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MLVF Malvern Bancorp

Filed: 11 Mar 21, 4:32pm

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended December 31, 2020

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from               to

Commission File Number:  000-54835

 

MALVERN BANCORP, INC.

(Exact Name of Registrant as Specified in Its Charter)

 

Pennsylvania

45-5307782

(State or Other Jurisdiction of

Incorporation or Organization)

(IRS Employer

Identification No.)

42 Lancaster Avenue, Paoli, Pennsylvania 19301

(Address of Principal Executive Offices) (Zip Code)

(610) 644-9400

(Registrant’s Telephone Number, Including Area Code)

 

Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report:  N/A

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, par value $0.01 per share

MLVF

Nasdaq Stock Market, LLC

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days. Yes No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes       No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See definition of “large accelerated filer”, “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act:

Large accelerated filer 

 

Accelerated filer 

Non-accelerated filer 

 

Smaller reporting company 

Emerging growth company

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No

 

Common Stock, par value $0.01:

7,609,953 shares

(Title of Class)

(Outstanding as of March 8, 2021)

 

 

 


 

Table of Contents

 

 

 

Page

 

 

 

PART I – FINANCIAL INFORMATION

3

 

 

 

Item  1.

Financial Statements

4

 

Consolidated Statements of Financial Condition at December 31, 2020 (unaudited) and September 30, 2020

4

 

Consolidated Statements of Operations for the three months ended December 31, 2020 and 2019 (unaudited)

5

 

Consolidated Statements of Comprehensive Income for the three months ended December 31, 2020 and 2019 (unaudited)

6

 

Consolidated Statements of Changes in Shareholders’ Equity for the three months ended December 31, 2020 and 2019 (unaudited)

7

 

Consolidated Statements of Cash Flows for the three months ended December 31, 2020 and 2019 (unaudited)

8

 

Notes to Unaudited Consolidated Financial Statements

9

 

 

 

Item  2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

45

 

 

 

Item  3.

Qualitative and Quantitative Disclosures about Market Risk

58

 

 

 

Item  4.

Controls and Procedures

58

 

 

 

PART II – OTHER INFORMATION.

60

 

 

 

Item  1.

Legal Proceedings

60

 

 

 

Item  1A.

Risk Factors

60

 

 

 

Item  2.

Unregistered Sales of Equity Securities and Use of Proceeds

60

 

 

 

Item  3.

Default Upon Senior Securities

60

 

 

 

Item  4.

Mine Safety Disclosure

60

 

 

 

Item  5.

Other Information

60

 

 

 

Item  6.

Exhibits

60

 

 

 

SIGNATURES

61

 

 

 


 

PART I – FINANCIAL INFORMATION

The following (a) consolidated balance sheet as of September 30, 2020, which has been derived from audited financial statements, and (b) unaudited consolidated financial statements, have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X, and, accordingly, do not include all of the information and footnotes required by GAAP for complete financial statements. However, in the opinion of management, all adjustments (consisting only of normal and recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three months ended December 31, 2020 are not necessarily indicative of the results that may be expected for the full year ending September 30, 2021, or for any interim period. The Malvern Bancorp, Inc. Annual Report on Form 10-K for the fiscal year ended September 30, 2020, as amended on February 26, 2021 (the “2020 Annual Report”), should be read in conjunction with these financial statements.

 

-3-


 

Item 1. Financial Statements

MALVERN BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

 

 

 

December 31,

2020

 

 

September 30,

2020

 

 

 

(Unaudited)

 

 

 

 

 

 

 

(In thousands, except share data)

 

ASSETS

 

 

 

 

 

 

 

 

Cash and due from depository institutions

 

$

83,764

 

 

$

16,386

 

Interest bearing deposits in depository institutions

 

 

25,458

 

 

 

45,053

 

Cash and Cash Equivalents

 

 

109,222

 

 

 

61,439

 

Investment securities available for sale, at fair value (amortized cost of

   $35,239 and $31,658, respectively)

 

 

35,224

 

 

 

31,541

 

Investment securities held to maturity (fair value of $14,745 and $15,608,

   respectively)

 

 

14,161

 

 

 

14,970

 

Restricted stock, at cost

 

 

9,327

 

 

 

9,622

 

Loans receivable, net of allowance for loan losses of $13,035 and $12,433,

   respectively

 

 

990,346

 

 

 

1,026,894

 

Other real estate owned

 

 

5,796

 

 

 

5,796

 

Accrued interest receivable

 

 

4,051

 

 

 

3,677

 

Operating lease right-of-use assets

 

 

2,479

 

 

 

2,638

 

Property and equipment, net

 

 

6,154

 

 

 

6,274

 

Deferred income taxes

 

 

3,601

 

 

 

3,680

 

Bank-owned life insurance

 

 

25,564

 

 

 

25,400

 

Other assets

 

 

14,999

 

 

 

16,344

 

Total Assets

 

$

1,220,924

 

 

$

1,208,275

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

Deposits:

 

 

 

 

 

 

 

 

Deposits-non-interest-bearing

 

 

49,264

 

 

 

50,422

 

Deposits-interest-bearing

 

 

851,201

 

 

 

840,484

 

Total Deposits

 

 

900,465

 

 

 

890,906

 

FHLB advances

 

 

130,000

 

 

 

130,000

 

Secured borrowing

 

 

-

 

 

 

4,225

 

Other short-term borrowing

 

 

5,000

 

 

 

-

 

Subordinated debt

 

 

24,816

 

 

 

24,776

 

Advances from borrowers for taxes and insurance

 

 

1,881

 

 

 

1,741

 

Accrued interest payable

 

 

1,078

 

 

 

728

 

Operating lease liabilities

 

 

2,512

 

 

 

2,671

 

Other liabilities

 

 

11,906

 

 

 

12,635

 

Total Liabilities

 

 

1,077,658

 

 

 

1,067,682

 

Commitments and Contingencies

 

 

-

 

 

 

-

 

Shareholders’ Equity

 

 

 

 

 

 

 

 

Preferred stock, $0.01 par value, 10,000,000 shares authorized, NaN issued

 

 

-

 

 

 

-

 

Common stock, $0.01 par value, 50,000,000 shares authorized; 7,804,469 and

   7,609,953 shares issued and outstanding, respectively, at December 31, 2020

   and 7,804,469 and 7,609,953 shares issued and outstanding, respectively, at September 30, 2020

 

 

76

 

 

 

76

 

Additional paid-in-capital

 

 

85,195

 

 

 

85,127

 

Retained earnings

 

 

62,661

 

 

 

60,388

 

Unearned Employee Stock Ownership Plan (ESOP) shares

 

 

(1,010

)

 

 

(1,047

)

Accumulated other comprehensive loss

 

 

(793

)

 

 

(1,088

)

    Treasury stock, at cost: 194,516 shares and 194,516 shares at December 31, 2020 and September 30, 2020, respectively

 

 

(2,863

)

 

 

(2,863

)

Total Shareholders’ Equity

 

 

143,266

 

 

 

140,593

 

Total Liabilities and Shareholders’ Equity

 

$

1,220,924

 

 

$

1,208,275

 

 

See accompanying notes to unaudited consolidated financial statements.

-4-


 

MALVERN BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

 

 

Three Months Ended December 31,

 

 

 

2020

 

 

2019

 

 

 

 

 

 

 

Restated

 

 

 

(In thousands, except share data)

 

Interest and Dividend Income

 

 

 

 

 

 

 

 

Loans, including fees

 

$

10,076

 

 

$

10,926

 

Investment securities, taxable

 

 

347

 

 

 

215

 

Investment securities, tax-exempt

 

 

24

 

 

 

39

 

Dividends, restricted stock

 

 

141

 

 

 

188

 

Interest-bearing cash accounts

 

 

8

 

 

 

472

 

Total Interest and Dividend Income

 

 

10,596

 

 

 

11,840

 

Interest Expense

 

 

 

 

 

 

 

 

Deposits

 

 

2,257

 

 

 

3,737

 

Short-term borrowings

 

 

45

 

 

 

-

 

Long-term borrowings

 

 

607

 

 

 

832

 

Subordinated debt

 

 

383

 

 

 

383

 

Total Interest Expense

 

 

3,292

 

 

 

4,952

 

Net Interest Income

 

 

7,304

 

 

 

6,888

 

Provision for Loan Losses

 

 

550

 

 

 

2,150

 

Net Interest Income after Provision for Loan losses

 

 

6,754

 

 

 

4,738

 

Other Income

 

 

 

 

 

 

 

 

Service charges and other fees

 

 

247

 

 

 

259

 

Rental income

 

 

54

 

 

 

54

 

Net gains on sale and call of investments

 

 

355

 

 

 

-

 

Net gains on sale of loans

 

 

404

 

 

 

3

 

Earnings on bank-owned life insurance

 

 

164

 

 

 

127

 

Total Other Income

 

 

1,224

 

 

 

443

 

Other Expenses

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

 

2,272

 

 

 

2,125

 

Occupancy expense

 

 

542

 

 

 

582

 

Federal deposit insurance premium

 

 

76

 

 

 

(3

)

Advertising

 

 

32

 

 

 

22

 

Data processing

 

 

328

 

 

 

278

 

Professional fees

 

 

663

 

 

 

441

 

Other real estate owned expense, net

 

 

28

 

 

 

71

 

Pennsylvania shares tax

 

 

170

 

 

 

170

 

Other operating expenses

 

 

861

 

 

 

736

 

Total Other Expenses

 

 

4,972

 

 

 

4,422

 

Income before income tax expense

 

 

3,006

 

 

 

759

 

Income tax expense (benefit)

 

 

733

 

 

 

(26

)

Net Income

 

$

2,273

 

 

$

785

 

Earnings Per Common Share:

 

 

 

 

 

 

 

 

Basic

 

$

0.30

 

 

$

0.10

 

Diluted

 

$

0.30

 

 

$

0.10

 

Weighted Average Common Shares Outstanding:

 

 

 

 

 

 

 

 

Basic

 

 

7,525,808

 

 

 

7,665,842

 

Diluted

 

 

7,526,376

 

 

 

7,665,842

 

 

See accompanying notes to unaudited consolidated financial statements.

-5-


 

MALVERN BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

 

 

 

Three Months Ended December 31,

 

 

 

2020

 

 

2019

 

 

 

(In thousands)

 

Net Income

 

$

2,273

 

 

$

785

 

Other Comprehensive Income (Loss), Net of Tax:

 

 

 

 

 

 

 

 

Unrealized holding (losses) gains on available-for-sale securities

 

 

457

 

 

 

71

 

Tax effect

 

 

(96

)

 

 

(15

)

Net of tax amount

 

 

361

 

 

 

56

 

 

 

 

 

 

 

 

 

 

Reclassification adjustment for net gains arising during the period (1)

 

 

(355

)

 

 

-

 

Tax effect

 

 

74

 

 

 

-

 

Net of tax amount

 

 

(281

)

 

 

-

 

 

 

 

 

 

 

 

 

 

  Adjustment for loss recorded on replacement of derivative

 

 

(2

)

 

 

-

 

 

 

 

 

 

 

 

 

 

Amortization of unrealized holding losses on securities transferred from available-for-sale to held-to-maturity (2)

 

 

1

 

 

 

1

 

Tax effect

 

 

-

 

 

 

-

 

Net of tax amount

 

 

1

 

 

 

1

 

Fair value adjustments on derivatives

 

 

273

 

 

 

91

 

Tax effect

 

 

(57

)

 

 

(19

)

Net of tax amount

 

 

216

 

 

 

72

 

Total other comprehensive income

 

 

295

 

 

 

129

 

Total comprehensive income

 

$

2,568

 

 

$

914

 

 

 

(1)

Amounts are included in net gains on sale of investments on the Consolidated Statements of Operations in total other income.

 

(2)

Amounts are included in interest and dividends on investment securities on the Consolidated Statements of Operations.

See accompanying notes to unaudited consolidated financial statements.

-6-


 

MALVERN BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

(Unaudited)

 

 

 

Common

Stock

 

 

Additional

Paid-In

Capital

 

 

Retained

Earnings

 

 

Unearned

ESOP

Shares

 

 

Accumulated

Other

Comprehensive

Income (Loss)

 

 

Treasury Stock

 

 

Total

Shareholders'

Equity

 

 

 

(In thousands, except share data)

 

Balance, October 1, 2019

 

 

78

 

 

 

84,783

 

 

 

59,744

 

 

 

(1,192

)

 

 

(569

)

 

 

(336

)

 

 

142,508

 

Net Income

 

 

-

 

 

 

-

 

 

 

785

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

785

 

Other comprehensive income

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

129

 

 

 

-

 

 

 

129

 

Committed to be released ESOP

   shares (3,600 shares)

 

 

-

 

 

 

45

 

 

 

-

 

 

 

36

 

 

 

-

 

 

 

-

 

 

 

81

 

Stock based compensation

 

 

-

 

 

 

32

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

32

 

Balance, December 31, 2019

 

 

78

 

 

 

84,860

 

 

 

60,529

 

 

 

(1,156

)

 

 

(440

)

 

 

(336

)

 

 

143,535

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, October 1, 2020

 

 

76

 

 

 

85,127

 

 

 

60,388

 

 

 

(1,047

)

 

 

(1,088

)

 

 

(2,863

)

 

 

140,593

 

Net Income

 

 

-

 

 

 

-

 

 

 

2,273

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

2,273

 

Other comprehensive income

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

295

 

 

 

-

 

 

 

295

 

Treasury stock activity

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Committed to be released ESOP

   shares (3,600 shares)

 

 

-

 

 

 

16

 

 

 

-

 

 

 

37

 

 

 

-

 

 

 

-

 

 

 

53

 

Stock based compensation

 

 

-

 

 

 

52

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

52

 

Balance, December 31, 2020

 

$

76

 

 

$

85,195

 

 

$

62,661

 

 

$

(1,010

)

 

$

(793

)

 

$

(2,863

)

 

$

143,266

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying notes to unaudited consolidated financial statements.

 

-7-


 

MALVERN BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

 

 

Three Months Ended December 31,

 

 

 

2020

 

 

2019

 

 

 

(In thousands)

 

Cash Flows from Operating Activities

 

 

 

 

 

 

 

 

Net income

 

$

2,273

 

 

$

785

 

Adjustments to reconcile net income to net cash provided by

   operating activities:

 

 

 

 

 

 

 

 

Depreciation expense

 

 

170

 

 

 

187

 

Provision for loan losses

 

 

550

 

 

 

2,150

 

Deferred income tax expense

 

 

79

 

 

 

34

 

ESOP expense

 

 

53

 

 

 

81

 

Stock based compensation

 

 

52

 

 

 

32

 

Amortization of premiums and discounts on investments securities, net

 

 

95

 

 

 

181

 

Amortization of loan origination fees and costs

 

 

1,218

 

 

 

1,535

 

Amortization of mortgage servicing rights

 

 

24

 

 

 

5

 

Net gain on sale and call of investments securities available-for-sale

 

 

(355

)

 

 

-

 

Net gain on sale of secondary market loans

 

 

(404

)

 

 

(3

)

Proceeds from sale of secondary market loans

 

 

6,632

 

 

 

73

 

Originations of  secondary market loans

 

 

(6,228

)

 

 

(70

)

Earnings on bank-owned life insurance

 

 

(164

)

 

 

(127

)

(Increase) decrease in accrued interest receivable

 

 

(374

)

 

 

192

 

Increase in accrued interest payable

 

 

350

 

 

 

293

 

Operating lease liability payments

 

 

(172

)

 

 

(166

)

(Decrease) increase in other liabilities

 

 

(888

)

 

 

1,410

 

Decrease in other assets

 

 

1,846

 

 

 

1,239

 

Amortization of subordinate debt

 

 

40

 

 

 

39

 

Net Cash Provided by Operating Activities

 

 

4,797

 

 

 

7,870

 

 

 

 

 

 

 

 

 

 

Cash Flows from Investing Activities

 

 

 

 

 

 

 

 

Investment securities available-for-sale:

 

 

 

 

 

 

 

 

Purchases

 

 

(10,500

)

 

 

(5,252

)

        Sales

 

 

6,830

 

 

 

-

 

Maturities, calls and principal repayments

 

 

428

 

 

 

2

 

Investment securities held-to-maturity:

 

 

 

 

 

 

 

 

Maturities, calls and principal repayments

 

 

730

 

 

 

1,737

 

Net decrease in loans

 

 

34,779

 

 

 

11,425

 

Net decrease in restricted stock

 

 

295

 

 

 

14

 

Purchase of property and equipment

 

 

(50

)

 

 

(103

)

Net Cash Provided by Investing Activities

 

 

32,512

 

 

 

7,823

 

Cash Flows from Financing Activities

 

 

 

 

 

 

 

 

Net increase (decrease) in deposits

 

 

9,559

 

 

 

(9,992

)

Proceeds for long-term borrowings

 

 

90,000

 

 

 

-

 

Repayment of long-term borrowings

 

 

(90,000

)

 

 

-

 

Repayment of secured borrowings

 

 

(4,225

)

 

 

(25

)

Proceeds of other borrowed money

 

 

5,000

 

 

 

-

 

Increase in advances from borrowers for taxes and insurance

 

 

140

 

 

 

583

 

Net Cash Provided by (Used in) Financing Activities

 

 

10,474

 

 

 

(9,434

)

Net Increase in Cash and Cash Equivalents

 

 

47,783

 

 

 

6,259

 

Cash and Cash Equivalents - Beginning

 

 

61,439

 

 

 

153,543

 

Cash and Cash Equivalents - Ending

 

$

109,222

 

 

$

159,802

 

Supplemental Cash Flows Information

 

 

 

 

 

 

 

 

Interest paid

 

$

2,942

 

 

$

4,614

 

   Impact of ASC 842 adoption:

 

 

 

 

 

 

 

 

      Right-of-use asset

 

$

-

 

 

$

3,279

 

      Operating lease liability

 

$

-

 

 

$

(3,279

)

 

 

 

 

 

 

 

 

 

See accompanying notes to unaudited consolidated financial statements.

-8-


 

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Note 1 – The Company

Malvern Bancorp, Inc. (the “Company” or “Malvern Bancorp”), a Pennsylvania corporation, is a bank holding company registered under the Bank Holding Company Act of 1956, as amended (the “Holding Company Act”).  Malvern Bancorp is the holding company for Malvern Bank, National Association (“Malvern Bank” or the “Bank”), a national bank that was originally organized in 1887 as a federally-chartered savings bank.

The Company’s primary business is the ownership and operation of the Bank.  The Bank’s principal business consists of attracting deposits from businesses and the general public and investing those deposits, together with borrowings and funds generated from operations, in commercial and multi-family real estate loans, one- to four-family residential real estate loans, construction and development loans, commercial business loans, home equity loans, lines of credit, and other consumer loans. We also invest in and maintain a portfolio of investment securities, primarily comprised of corporate bonds, mortgage-backed securities, U.S. agency and bank qualified municipal obligations. Malvern Bank is one of the oldest banks headquartered on the Philadelphia Main Line.  For more than a century, the Bank has been committed to helping people build prosperous communities as a trusted financial partner, forging lasting relationships through teamwork, respect and integrity. The Bank’s primary market niche is providing personalized service to its client base.  

The Bank conducts business from its headquarters in Paoli, Pennsylvania, a suburb of Philadelphia, and through its nine other banking locations in Chester and Delaware counties, Pennsylvania, Morristown, New Jersey, its New Jersey regional headquarters, and Palm Beach, Florida. The Bank also maintains representative offices in Wellington, Florida and Allentown, Pennsylvania.  

In preparing the unaudited consolidated financial statements, management has made estimates and assumptions that affect the reported amounts of assets and liabilities as of the dates of the unaudited consolidated statements of condition and that affect the results of operations for the periods presented. Actual results could differ significantly from those estimates. Material estimates that are particularly susceptible to change in the near term relate to the determination of the allowance for loan losses, other real estate owned, the evaluation of deferred tax assets, the other-than-temporary impairment evaluation of securities, and the valuation of derivative positions.  The unaudited consolidated financial statements have been prepared in conformity with GAAP.

Note 2 – Summary of Significant Accounting Policies

Basis of financial statement presentation. The unaudited condensed consolidated financial statements of the Company include the accounts of the Company and its subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.

 

The accompanying unaudited condensed consolidated financial statements present the Company’s financial condition at December 31, 2020 and September 30, 2020 and the results of operations for the three months ended December 31, 2020 and 2019, and cash flows for the three months ended December 31, 2020 and 2019. In management’s opinion, the unaudited condensed consolidated financial statements contain all adjustments, which include normal and recurring adjustments, necessary for a fair presentation of the financial position and results of operations as of the dates and for the interim periods presented. These unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and note disclosures included in the 2020 Annual Report filed with the Securities and Exchange Commission (“SEC”). The consolidated statements of operations for the three months ended December 31, 2020 and the consolidated statements of cash flows for the three months ended December 31, 2020 are not necessarily indicative of the results of operations or cash flows for the full year ending September 30, 2021 or any interim period. Subsequent events have been evaluated through the date of the issuance of the unaudited Consolidated Financial Statements. No significant subsequent events have occurred through this date requiring adjustment to the financial statements or disclosures.

 

Operating, Accounting and Reporting Considerations related to COVID-19

 

The COVID-19 pandemic has negatively impacted the global economy.  In response to the crisis, the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act was passed by Congress and signed into law on March 27, 2020.  The CARES Act provides an estimated $2.2 trillion to fight the COVID-19 pandemic and stimulate the economy by supporting individuals and businesses through loans, grants, tax changes, and other types of relief.  Under Section 4013 of the CARES Act, and based upon regulatory guidance promulgated by federal banking regulators, qualifying short-term loan modifications resulting in payment deferrals that are attributable to the adverse impact of COVID-19, are not considered to be troubled debt restructurings (“TDRs”).  Some of the provisions applicable to the Company include, but are not limited to:

 

-9-


 

 

Accounting for Loan Modifications – The CARES Act provides that a financial institution may elect to suspend (1) the requirements under GAAP for certain loan modifications that would otherwise be categorized as a TDR and (2) any determination that such loan modifications would be considered a TDR, including the related impairment for accounting purposes. The suspension is applicable for the term of the loan modification that occurs during the applicable period for a loan that was not more than 30 days past due as of December 31, 2019. The suspension is not applicable to any adverse impact on the credit of a borrower that is not related to the COVID-19 pandemic.

 

Paycheck Protection Program – The CARES Act established the Paycheck Protection Program (“PPP”), an expansion of the Small Business Administration’s 7(a) loan program and the Economic Injury Disaster Loan Program (“EIDL”), administrated directly by the Small Business Administration (“SBA”).

 

Mortgage Forbearance – Under the CARES Act, through the earlier of December 31, 2020, mortgage customers experiencing financial hardship due to COVID-19 may request forbearance on a loan for up to 30 days, with up to two additional 30-day periods at the borrower’s request.  

 

Also in response to the COVID-19 pandemic, the Board of Governors of the Federal Reserve System (“FRB”), the Federal Deposit Insurance Corporation (“FDIC”), the National Credit Union Administration (“NCUA”), the Office of the Comptroller of the Currency (“OCC”), and the Consumer Financial Protection Bureau (“CFPB”), in consultation with the state financial regulators (collectively, the “agencies”) issued a joint interagency statement (issued March 22, 2020; revised statement issued April 7, 2020).  Some of the provisions applicable to the Company include, but are not limited to:

 

 

Accounting for Loan Modifications – Loan modifications that do not meet the conditions of the CARES Act may still qualify as a modification that does not need to be accounted for as a TDR.  The agencies confirmed with the Financial Accounting Standards Board (“FASB”) staff that short-term modifications made on a good faith basis in response to COVID-19 to borrowers who are current prior to any relief are not TDRs.  This includes short-term (e.g., six months) modifications such as payment deferrals, fee waivers, extensions of repayment terms, or insignificant delays in payments.  Loan modifications were made in accordance with Section 4013 of the CARES Act and the Interagency Statement on Loan Modifications and Reporting for Financial Institutions working with customers affected by COVID-19 and therefore were not classified as TDRs.

 

Past Due Reporting – With regard to loans not otherwise reportable as past due, financial institutions are not expected to designate loans with deferrals granted due to COVID-19 as past due because of the deferral.  A loan’s payment date is governed by the due date stipulated in the legal agreements.  If a financial institution agrees to a payment deferral, these loans would not be considered past due during the period of the deferral.

 

Nonaccrual Status and Charge-offs – During short-term COVID-19 modifications, these loans generally should not be reported as nonaccrual or as classified.

 

 

Recent Accounting Pronouncements Yet to Be Adopted

 

Reference Rate Reform. In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848). The guidance allows for companies to: (1) account for certain contract modifications as a continuation of the existing contract without additional analysis; (2) continue hedge accounting when certain critical terms of a hedging relationship change and assess effectiveness in ways that disregard certain potential sources of ineffectiveness; and (3) make a one-time sale and/or transfer of certain debt securities from held-to-maturity to available-for-sale or trading. This ASU is available for adoption effective immediately, or as of January 1, 2020 or any date thereafter for the Company, and applies prospectively to contract modifications and hedging relationships. The one-time election to sell and/or transfer debt securities classified as held-to-maturity may be made at any time after March 12, 2020. The Company anticipates adopting this ASU and will continue to analyze the provisions of the ASU in connection with ongoing procedures to monitor the work of the Alternative Rates Committee of the FRB and Federal Reserve Bank of New York in identifying an alternative U.S. dollar reference interest rate. It is too early to predict a new rate index replacement, but we anticipate that it will be the Secured Overnight Financing Rate (“SOFR”). The adoption of this new requirement is not expected to have a material impact on the consolidated earnings, financial position or cash flows of the Company.

Income Taxes. In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740). This ASU identifies, evaluates, and improves areas of GAAP for which cost and complexity can be reduced while maintaining or improving the usefulness of the information provided to users of financial statements. The ASU is effective for fiscal years beginning after December 15, 2020, with early adoption permitted. The adoption of this new requirement is not expected to have a material impact on the consolidated earnings, financial position or cash flows of the Company.

 

-10-


 

Credit Losses. In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. This ASU requires an organization to measure all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking information to better inform their credit loss estimates. Many of the loss estimation techniques applied currently will still be permitted, although the inputs to those techniques will change to reflect the full amount of expected credit losses. Organizations will continue to use judgment to determine which loss estimation method is appropriate for their circumstances. Additionally, this ASU amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration.  In April 2019, the FASB issued ASU 2019-04, Codification Improvements, which provides guidance on accounting for credit losses on accrued interest receivable balances and guidance on including recoveries when estimating the allowance. In May 2019, the FASB issued ASU 2019-05, Targeted Transition Relief, which allows entities with an option to elect fair value for certain instruments upon adoption of Topic 326. This ASU will be effective for interim and annual periods beginning after December 15, 2019, with early adoption permitted.  The Bank has a software system in place to assist with the calculation of Current Expected Credit Losses (“CECL”).  In November 2019, the FASB issued ASU No. 2019-10, Financial Instruments-Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842) making this ASU effective for interim and annual periods beginning after December 15, 2022. As such, the Company would be required to implement the ASU on October 1, 2023. In November 2019, the FASB issued ASU No. 2019-11, Codification Improvements to Topic 326, Financial Instruments-Credit Losses, which provides guidance on stakeholders’ specific issues about certain aspects of the amendments in ASU 2016-13.  The Company formed a cross functional implementation team to review the requirements of ASU 2016-13 and contracted with a third-party provider to assist in the development and implementation of the revised credit loss methodology. The impact on the consolidated earnings, financial position and cash flows of the Company upon adoption of this ASU are currently unknown. 

  

 

 

 


-11-


 

Note 3 – Risks and Uncertainties

 

On March 11, 2020, the World Health Organization declared COVID-19, the disease caused by the novel coronavirus, a pandemic as a result of the global spread of the coronavirus illness. In response to the outbreak, federal and state authorities in the U.S. introduced various measures to try to limit or slow the spread of the virus, including travel restrictions, nonessential business closures, stay-at-home orders, and strict social distancing. The Company activated its “Pandemic Plan” to protect the health of employees and clients, which includes temporarily limiting lobby hours and transitioning some of the Company’s workforce to remote work.

 

The full impact of COVID-19 is unknown and rapidly evolving. It has caused substantial disruption in international and U.S. economies, markets, and employment. The outbreak may have a significant adverse impact on certain industries the Company serves. Because of the significant uncertainties related to the ultimate duration of the COVID-19 pandemic and its potential effects on clients and prospects, and on the national and local economy as a whole, there can be no assurances as to how the crisis may ultimately affect the Company’s loan portfolio.

 

To work with clients impacted by COVID-19, the Company began providing financial hardship relief in the form of payment deferrals and forbearances to consumers and business customers across several lending products, as well as suspension of home foreclosures.  The initial payment deferrals and forbearances were expected to cover a period of three months. The Company subsequently approved a second forbearance period for a maximum of 90 additional days.  These offers are not classified as TDRs, will not be reported as past due during the deferral period, and do not result in loans being placed on nonaccrual status. As of December 31, 2020, the Company entered into 16 loan modification agreements with respect to $68.9 million worth of loans, representing 6.9 percent of loans outstanding, compared to 43 loan modification agreements with respect to $144.8 million worth of loans, representing 13.9 percent of loans outstanding, as of September 30, 2020. For loans subject to the program, each borrower is required to resume making regularly scheduled loan payments at the end of the modification period and the deferred amounts will be moved to the end of the loan term.

 

         As disclosed above, on March 27, 2020, the CARES Act was signed into law. The CARES Act is a $2.0 trillion stimulus package to provide relief to U.S. businesses and consumers struggling as a result of the COVID-19 pandemic. A provision in the CARES Act includes a $349.0 billion fund for the creation of the PPP through the SBA and Treasury Department. The PPP is intended to provide loans to small businesses to pay their employees, rent, mortgage interest, and utilities. The loans may be forgiven, conditioned upon the client providing payroll documentation evidencing their compliant use of funds and otherwise complying with the terms of the program. The Company participated in the initial PPP when the program was officially launched by the SBA and Treasury Department under the CARES Act. Recognizing the significance of operational risk that this portfolio of loans poses, and the continued complexity and uncertainty surrounding evolving regulatory pronouncements regarding various aspects of the PPP, management reviewed several options for continued servicing of the PPP loan portfolio through forgiveness and beyond. After thoughtful consideration, the Company concluded that it was in the best interests of both the Bank and our PPP borrowers that the loans be serviced by an organization that has the servicing infrastructure in place to support the significant volume and short timeframe involved in the complex and evolving PPP forgiveness process. In that regard, in mid-December, the Bank sold substantially all of its PPP loans to a seasoned and experienced non-bank lender and servicer of SBA loans. In connection with the sale, the Company recognized a $202,000 net gain on the sale of approximately $19.7 million of PPP loans, which was recorded as non-interest income for the period ended December 31, 2020. We are currently working with the same third party in order for our customers to be able to participate in the updated PPP loan program adopted as part of the COVID-19 stimulus bill enacted in December 2020 as part of the 2021 Consolidated Appropriations Act.

 

Subsequent to December 31, 2020 a $13.4 million commercial real estate loan classified as substandard loan as of December 31, 2020 was placed on non-accrual status during the quarter ended March 31, 2021, based on additional information received from the borrower.  As of December 31, 2020, this loan was current and borrower was making payments in accordance with loan’s contractual terms.

 

 


-12-


 

Note 4 – Non-Interest Income

On October 1, 2018, the Company adopted the amendments of ASU 2014-09 - Revenue from Contracts with Customers (Topic 606) and all subsequent ASUs that modified Topic 606. A significant amount of the Company’s revenues is derived from net interest income on financial assets and liabilities, which are excluded from the scope of the amended guidance. Some sources of revenue included within non-interest income fall within the scope of Topic 606, while other sources do not. The Company recognizes revenue when the performance obligations related to the transfer of goods or services under the terms of the contract are satisfied. Some obligations are satisfied at a point in time while others are satisfied over a period of time. Revenue is recognized as the amount of consideration to which the Company expects to be entitled in exchange for transferring goods or services to a customer. When consideration includes a variable component, the amount of consideration attributable to variability is included in the transaction price only to the extent it is probable that significant revenue recognized will not be reversed when uncertainty associated with the variable consideration is subsequently resolved. The Company’s contracts generally do not contain terms that require significant judgement to determine the variability impacting the transaction price. The Company has included the following table regarding the Company’s non-interest income for the periods presented:

 

 

 

Three Months Ended December 31,

 

 

 

2020

 

 

2019

 

 

 

(In thousands)

 

Rental income

 

$

54

 

 

$

54

 

Net gains on sale and call of investments

 

 

355

 

 

 

-

 

Net gains on sale of loans

 

 

404

 

 

 

3

 

Earnings on bank-owned life insurance

 

 

164

 

 

 

127

 

Non-interest income within the scope of other GAAP topics

 

$

977

 

 

$

184

 

ATM fees

 

$

3

 

 

$

2

 

Credit card fee income

 

 

5

 

 

 

6

 

DDA fee income

 

 

22

 

 

 

30

 

DDA service fees

 

 

24

 

 

 

19

 

Debit card fees

 

 

64

 

 

 

66

 

Other loan fee income

 

 

72

 

 

 

77

 

Other fee income

 

 

55

 

 

 

57

 

Other non-interest income

 

 

2

 

 

 

2

 

Non-interest income from contracts with customers

 

$

247

 

 

$

259

 

Total Non-interest Income

 

$

1,224

 

 

$

443

 

 

 

 


-13-


 

 

Note 5 – Earnings Per Share

Basic earnings per common share is computed based on the weighted average number of shares outstanding reduced by unearned Employee Stock Ownership Plan (“ESOP”) shares. Diluted earnings per share is computed based on the weighted average number of shares outstanding and common stock equivalents (“CSEs”) that would arise from the exercise of dilutive securities, reduced by unearned ESOP shares.  During the three months ended December 31, 2020, there were 0 restricted shares issued. There were 0 stock options granted during the three months ended December 31, 2020.  During the three months ended December 31, 2019, the Company granted 1,764 restricted shares, which are considered CSEs. There were 0 stock options granted during the three months ended December 31, 2019. 

The following table sets forth the composition of the weighted average shares (denominator) used in the earnings per share computations:

 

 

 

Three Months Ended December 31,

 

 

 

 

2020

 

 

2019

 

 

 

 

(In thousands, except share data)

Net Income

 

$

2,273

 

 

$

785

 

 

Weighted average shares outstanding

 

 

7,609,953

 

 

 

7,764,383

 

 

Average unearned ESOP shares

 

 

(84,145

)

 

 

(98,541

)

 

Basic weighted average shares outstanding

 

 

7,525,808

 

 

 

7,665,842

 

 

Plus: effect of potential dilutive common stock equivalents - stock options

 

 

568

 

 

 

-

 

 

Diluted weighted average common shares outstanding

 

 

7,526,376

 

 

 

7,665,842

 

 

Earnings per common share:

 

 

 

 

 

 

 

 

 

Basic

 

$

0.30

 

 

$

0.10

 

 

Diluted

 

$

0.30

 

 

$

0.10

 

 

 

Note 6 – Employee Stock Ownership Plan

The Company maintains an ESOP for substantially all of its full-time employees. The current ESOP trustee is Pentegra.  Shares of the Company’s common stock purchased by the ESOP are held until released for allocation to participants.  Shares released are allocated to each eligible participant based on the ratio of each such participant’s base compensation to the total base compensation of all eligible plan participants. As the unearned shares are committed to be released and allocated among participants, the Company recognizes compensation expense equal to the fair value of the ESOP shares during the periods in which they become committed to be released.  To the extent that the fair value of the ESOP shares released differs from the cost of such shares, the difference is charged or credited to additional paid-in capital.  During the period from May 20, 2008 to September 30, 2008, the ESOP purchased 241,178 shares of Company common stock for approximately $2.6 million, at an average price of $10.86 per share, which was funded by a loan from Malvern Federal Bancorp, Inc. (the Company’s predecessor).  The ESOP loan, which bears an interest rate of 5%, is being repaid in quarterly installments through 2026 principally from the Bank’s contributions to the ESOP.  Shares are released to participants proportionately as the ESOP loan is repaid. During each of the three months ended December 31, 2020 and 2019, there were 3,600 shares, committed to be released.  At December 31, 2020, there were 82,365 unallocated shares and 176,853 allocated shares held by the ESOP. The unallocated shares had an aggregate fair value of approximately $1.3 million at December 31, 2020.

Note 7 - Investment Securities

The Company’s investment securities are classified as available-for-sale or held-to-maturity at December 31, 2020 and at September 30, 2020. Investment securities available-for-sale are reported at fair value with unrealized gains or losses included in equity, net of tax. Accordingly, the carrying value of such securities reflects their fair value at the balance sheet date. Fair value is based upon either quoted market prices, or in certain cases where there is limited activity in the market for a particular instrument, assumptions are made to determine their fair value.   Held-to-maturity securities, which are carried at amortized cost, are investments where there is positive intent and ability to hold to maturity.

Transfers of debt securities from the available-for-sale category to the held-to-maturity category are made at fair value at the date of transfer. The unrealized holding gain or loss at the date of transfer remains in accumulated other comprehensive income and in the carrying value of the held-to-maturity investment security. Premiums or discounts on investment securities are amortized or accreted using the effective interest method over the life of the security as an adjustment of yield. Unrealized holding gains or losses that remain in accumulated other comprehensive income are amortized or accreted over the remaining life of the security as an adjustment of yield, offsetting the related amortization of the premium or accretion of the discount.

-14-


 

The following tables present information related to the Company’s investment securities at December 31, 2020 and September 30, 2020:

 

 

 

December 31, 2020

 

 

 

Amortized

Cost

 

 

Gross

Unrealized

Gains

 

 

Gross

Unrealized

Losses

 

 

Fair

Value

 

 

 

(In thousands)

 

Investment Securities Available-for-Sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government agencies

 

$

5,012

 

 

$

8

 

 

$

-

 

 

$

5,020

 

State and municipal obligations

 

 

2,675

 

 

 

3

 

 

 

-

 

 

 

2,678

 

Single issuer trust preferred security

 

 

1,000

 

 

 

-

 

 

 

(92

)

 

 

908

 

Corporate debt securities

 

 

25,032

 

 

 

222

 

 

 

(156

)

 

 

25,098

 

Mutual funds

 

 

1,520

 

 

 

-

 

 

 

-

 

 

 

1,520

 

Total

 

$

35,239

 

 

$

233

 

 

$

(248

)

 

$

35,224

 

Investment Securities Held-to-Maturity:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

State and municipal obligations

 

$

1,785

 

 

$

128

 

 

$

-

 

 

$

1,913

 

Corporate debt securities

 

 

3,469

 

 

 

233

 

 

 

-

 

 

 

3,702

 

Mortgage-backed securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Collateralized mortgage obligations (“CMO”), fixed-rate

 

 

8,907

 

 

 

223

 

 

 

-

 

 

 

9,130

 

        Total

 

$

14,161

 

 

$

584

 

 

$

-

 

 

$

14,745

 

Total investment securities

 

$

49,400

 

 

$

817

 

 

$

(248

)

 

$

49,969

 

 

 

 

September 30, 2020

 

 

 

Amortized

Cost

 

 

Gross

Unrealized

Gains

 

 

Gross

Unrealized

Losses

 

 

Fair

Value

 

 

 

(In thousands)

 

Investment Securities Available-for-Sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government agencies

 

$

5,025

 

 

$

15

 

 

$

-

 

 

$

5,040

 

State and municipal obligations

 

 

3,101

 

 

 

4

 

 

 

-

 

 

 

3,105

 

Single issuer trust preferred security

 

 

1,000

 

 

 

-

 

 

 

(75

)

 

 

925

 

Corporate debt securities

 

 

21,009

 

 

 

182

 

 

 

(243

)

 

 

20,948

 

Mutual fund

 

 

1,523

 

 

 

-

 

 

 

-

 

 

 

1,523

 

Total

 

$

31,658

 

 

$

201

 

 

$

(318

)

 

$

31,541

 

Investment Securities Held-to-Maturity:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

State and municipal obligations

 

$

1,794

 

 

$

129

 

 

$

-

 

 

$

1,923

 

Corporate debt securities

 

 

3,498

 

 

 

260

 

 

 

-

 

 

 

3,758

 

Mortgage-backed securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CMO, fixed-rate

 

 

9,678

 

 

 

249

 

 

 

-

 

 

 

9,927

 

        Total

 

$

14,970

 

 

$

638

 

 

$

-

 

 

$

15,608

 

Total investment securities

 

$

46,628

 

 

$

839

 

 

$

(318

)

 

$

47,149

 

 

 For the three months ended December 31, 2020, proceeds of available-for-sale investment securities sold amounted to approximately $6.8 million. There were gains of approximately $355,000 associated with these sales. There were 0 available-for-sale investment securities sold during the three months ended December 31, 2019. 

-15-


 

The following tables indicate gross unrealized losses not recognized in income and fair value, aggregated by investment category, and the length of time individual securities have been in a continuous unrealized loss position at December 31, 2020 and September 30, 2020:

 

 

 

December 31, 2020

 

 

 

Less than 12 Months

 

 

More than 12 Months

 

 

Total

 

 

 

Fair Value

 

 

Unrealized

Losses

 

 

Fair

Value

 

 

Unrealized

Losses

 

 

Fair

Value

 

 

Unrealized

Losses

 

 

 

(In thousands)

 

Investment Securities Available for Sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Single issuer trust preferred security

 

$

-

 

 

$

-

 

 

$

908

 

 

$

(92

)

 

$

908

 

 

$

(92

)

Corporate debt securities

 

 

2,495

 

 

 

(5

)

 

 

3,349

 

 

 

(151

)

 

 

5,844

 

 

 

(156

)

Total investment securities

 

$

2,495

 

 

$

(5

)

 

$

4,257

 

 

$

(243

)

 

$

6,752

 

 

$

(248

)

 

 

 

September 30, 2020

 

 

 

Less than 12 Months

 

 

More than 12 Months

 

 

Total

 

 

 

Fair

Value

 

 

Unrealized

Losses

 

 

Fair

Value

 

 

Unrealized

Losses

 

 

Fair

Value

 

 

Unrealized

Losses

 

 

 

(In thousands)

 

Investment Securities Available for Sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Single issuer trust preferred security

 

$

-

 

 

$

-

 

 

$

925

 

 

$

(75

)

 

$

925

 

 

$

(75

)

Corporate debt securities

 

 

4,426

 

 

 

(74

)

 

 

3,330

 

 

 

(169

)

 

 

7,756

 

 

 

(243

)

Total investment securities

 

$

4,426

 

 

$

(74

)

 

$

4,255

 

 

$

(244

)

 

$

8,681

 

 

$

(318

)

 

As of December 31, 2020, the estimated fair value of the securities disclosed above was primarily dependent upon the movement in market interest rates, particularly given the inherent credit risk associated with these securities. These investment securities are comprised of securities that are rated investment grade by at least one bond credit rating service. Although the fair value will fluctuate as market interest rates move, management believes that these fair values will recover as the underlying portfolios mature and are reinvested in market rate yielding investments. As of December 31, 2020, the Company held 4 corporate debt securities and 1 single issuer trust preferred security which were in an unrealized loss position. The Company does not intend to sell, and expects that it is unlikely that it will be required to sell, these securities until such time as the value recovers or the securities mature. Management does not believe any individual unrealized loss as of December 31, 2020 represents an other-than-temporary impairment.

Investment securities having a carrying value of approximately $9.4 million and $4.6 million at December 31, 2020 and September 30, 2020, respectively, were pledged to secure deposits. NaN investment securities were pledged to secure hedges at December 31, 2020 or September 30, 2020. NaN investment securities were pledged to secure short-term borrowings at December 31, 2020 and September 30, 2020.  

-16-


 

The following table presents information for investment securities at December 31, 2020, based on scheduled maturities. Actual maturities can be expected to differ from scheduled maturities due to prepayment or early call options of the issuer.

 

 

 

December 31, 2020

 

 

 

Amortized Cost

 

 

Fair Value

 

 

 

(In thousands)

 

Available-for-Sale:

 

 

 

 

 

 

 

 

Over 1 year through five years

 

$

6,675

 

 

$

6,528

 

After 5 years through ten years

 

 

22,052

 

 

 

22,178

 

Over 10 years

 

 

6,512

 

 

 

6,518

 

Total

 

$

35,239

 

 

$

35,224

 

Held-to-Maturity:

 

 

 

 

 

 

 

 

Over 1 year through five years

 

$

4,581

 

 

$

4,892

 

After 5 years through ten years

 

 

1,098

 

 

 

1,161

 

Mortgage-backed securities:

 

 

 

 

 

 

 

 

CMO, fixed-rate

 

 

8,482

 

 

 

8,692

 

Total

 

$

14,161

 

 

$

14,745

 

 

 

 

 

 

 

 

 

 

Total investment securities

 

$

49,400

 

 

$

49,969

 

 

Note 8 - Loans Receivable and Related Allowance for Loan Losses  

Loans receivable in the Company’s portfolio consisted of the following at the dates indicated below:

 

 

 

December 31, 2020

 

 

September 30, 2020

 

 

 

(In thousands)

 

Residential mortgage

 

$

232,481

 

 

$

242,090

 

Construction and Development:

 

 

 

 

 

 

 

 

Residential and commercial

 

 

73,000

 

 

 

65,703

 

Land

 

 

3,648

 

 

 

3,110

 

Total Construction and Development

 

 

76,648

 

 

 

68,813

 

Commercial:

 

 

 

 

 

 

 

 

Commercial real estate

 

 

478,808

 

 

 

495,398

 

Farmland

 

 

7,378

 

 

 

7,517

 

Multi-family

 

 

67,457

 

 

 

67,767

 

   Commercial and industrial

 

 

101,852

 

 

 

116,584

 

Other

 

 

10,010

 

 

 

10,142

 

Total Commercial

 

 

665,505

 

 

 

697,408

 

Consumer:

 

 

 

 

 

 

 

 

Home equity lines of credit

 

 

16,389

 

 

 

17,128

 

Second mortgages

 

 

9,097

 

 

 

10,711

 

Other

 

 

2,388

 

 

 

2,851

 

Total Consumer

 

 

27,874

 

 

 

30,690

 

Total loans

 

 

1,002,508

 

 

 

1,039,001

 

Deferred loan fees and costs, net

 

 

873

 

 

 

326

 

Allowance for loan losses

 

 

(13,035

)

 

 

(12,433

)

Total loans receivable, net

 

$

990,346

 

 

$

1,026,894

 

 

 

       

 

 

-17-


 

The following tables summarize the primary classes of the allowance for loan losses (“ALLL”), segregated into the amount required for loans individually evaluated for impairment and the amount required for loans collectively evaluated for impairment, as of December 31, 2020 and September 30, 2020.  Activity in the ALLL is presented for the three months ended December 31, 2020 and 2019 and the fiscal year ended September 30, 2020:

 

 

 

 

 

 

 

 

Construction and

Development

 

 

Commercial

 

 

Consumer

 

 

 

 

 

 

 

 

 

 

 

Residential

Mortgage

 

 

Residential

and

Commercial

 

 

Land

 

 

Commercial

Real Estate

 

 

Farmland

 

 

Multi-

Family

 

 

Commercial and Industrial

 

 

Other

 

 

Home Equity

Lines of Credit

 

 

Second

Mortgages

 

 

Other

 

 

Unallocated

 

 

Total

 

Allowance for loan losses:

 

(In thousands)

 

Three Months Ended December 31,

2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

 

$

1,667

 

 

$

465

 

 

$

23

 

 

$

8,682

 

 

$

47

 

 

$

511

 

 

$

578

 

 

$

51

 

 

$

130

 

 

$

196

 

 

$

29

 

 

$

54

 

 

$

12,433

 

Charge-offs

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(1

)

 

 

-

 

 

 

(1

)

Recoveries

 

 

1

 

 

 

-

 

 

 

-

 

 

 

1

 

 

 

-

 

 

 

-

 

 

 

1

 

 

 

-

 

 

 

-

 

 

 

50

 

 

 

-

 

 

 

-

 

 

 

53

 

Provisions

 

 

(65

)

 

 

43

 

 

 

1

 

 

 

(710

)

 

 

305

 

 

 

(3

)

 

 

21

 

 

 

(1

)

 

 

(5

)

 

 

(67

)

 

 

(3

)

 

 

1,034

 

 

 

550

 

Ending balance

 

$

1,603

 

 

$

508

 

 

$

24

 

 

$

7,973

 

 

$

352

 

 

$

508

 

 

$

600

 

 

$

50

 

 

$

125

 

 

$

179

 

 

$

25

 

 

$

1,088

 

 

$

13,035

 

Ending balance: individually evaluated

   for impairment

 

$

-

 

 

$

-

 

 

$

-

 

 

$

209

 

 

$

317

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

78

 

 

$

-

 

 

$

-

 

 

$

604

 

Ending balance: collectively evaluated

   for impairment

 

$

1,603

 

 

$

508

 

 

$

24

 

 

$

7,764

 

 

$

35

 

 

$

508

 

 

$

600

 

 

$

50

 

 

$

125

 

 

$

101

 

 

$

25

 

 

$

1,088

 

 

$

12,431

 

Loans receivable:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance

 

$

232,481

 

 

$

73,000

 

 

$

3,648

 

 

$

478,808

 

 

$

7,378

 

 

$

67,457

 

 

$

101,852

 

 

$

10,010

 

 

$

16,389

 

 

$

9,097

 

 

$

2,388

 

 

 

 

 

 

$

1,002,508

 

Ending balance: individually evaluated

   for impairment

 

$

3,721

 

 

$

-

 

 

$

-

 

 

$

25,547

 

 

$

2,287

 

 

$

-

 

 

$

549

 

 

$

-

 

 

$

73

 

 

$

365

 

 

$

-

 

 

 

 

 

 

$

32,542

 

Ending balance: collectively evaluated

   for impairment

 

$

228,760

 

 

$

73,000

 

 

$

3,648

 

 

$

453,261

 

 

$

5,091

 

 

$

67,457

 

 

$

101,303

 

 

$

10,010

 

 

$

16,316

 

 

$

8,732

 

 

$

2,388

 

 

 

 

 

 

$

969,966

 

 

 

 

 

 

 


-18-


 

 

 

 

 

 

 

Construction and

Development

 

 

Commercial

 

 

Consumer

 

 

 

 

 

 

 

 

 

 

 

Residential

Mortgage

 

 

Residential

and

Commercial

 

 

Land

 

 

Commercial

Real Estate

 

 

Farmland

 

 

Multi-

Family

 

 

Commercial and Industrial

 

 

Other

 

 

Home Equity

Lines of Credit

 

 

Second

Mortgages

 

 

Other

 

 

Unallocated

 

 

Total

 

Allowance for loan losses:

 

(In thousands)

 

Three Months Ended December,

2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

 

$

1,364

 

 

$

523

 

 

$

20

 

 

$

5,903

 

 

$

49

 

 

$

369

 

 

$

615

 

 

$

21

 

 

$

122

 

 

$

267

 

 

$

23

 

 

$

819

 

 

$

10,095

 

Charge-offs

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(2,288

)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(2

)

 

 

-

 

 

 

-

 

 

 

(2,290

)

Recoveries

 

 

-

 

 

 

-

 

 

 

-

 

 

 

1

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

6

 

 

 

-

 

 

 

-

 

 

 

7

 

Provisions

 

 

(82

)

 

 

62

 

 

 

(2

)

 

 

2,578

 

 

 

(11

)

 

 

(173

)

 

 

(151

)

 

 

12

 

 

 

(21

)

 

 

(36

)

 

 

-

 

 

 

(26

)

 

 

2,150

 

Ending balance

 

$

1,282

 

 

$

585

 

 

$

18

 

 

$

6,194

 

 

$

38

 

 

$

196

 

 

$

464

 

 

$

33

 

 

$

101

 

 

$

235

 

 

$

23

 

 

$

793

 

 

$

9,962

 

Ending balance: individually evaluated

   for impairment

 

$

-

 

 

$

-

 

 

$

-

 

 

$

112

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

98

 

 

$

-

 

 

$

-

 

 

$

210

 

Ending balance: collectively evaluated

   for impairment

 

$

1,282

 

 

$

585

 

 

$

18

 

 

$

6,082

 

 

$

38

 

 

$

196

 

 

$

464

 

 

$

33

 

 

$

101

 

 

$

137

 

 

$

23

 

 

$

793

 

 

$

9,752

 

Loans receivable:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance

 

$

234,738

 

 

$

49,095

 

 

$

3,625

 

 

$

521,495

 

 

$

7,563

 

 

$

43,473

 

 

$

99,494

 

 

$

8,569

 

 

$

18,372

 

 

$

13,179

 

 

$

2,160

 

 

 

 

 

 

$

1,001,763

 

Ending balance: individually evaluated

   for impairment

 

$

3,527

 

 

$

-

 

 

$

-

 

 

$

7,649

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

29

 

 

$

902

 

 

$

-

 

 

 

 

 

 

$

12,107

 

Ending balance: collectively evaluated

   for impairment

 

$

231,211

 

 

$

49,095

 

 

$

3,625

 

 

$

513,846

 

 

$

7,563

 

 

$

43,473

 

 

$

99,494

 

 

$

8,569

 

 

$

18,343

 

 

$

12,277

 

 

$

2,160

 

 

 

 

 

 

$

989,656

 

-19-


 

 

 

 

 

 

 

 

Construction and

Development

 

 

Commercial

 

 

Consumer

 

 

 

 

 

 

 

 

 

Residential

Mortgage

 

 

Residential

and

Commercial

 

 

Land

 

 

Commercial

Real Estate

 

 

Farmland

 

 

Multi-

Family

 

 

Commercial and Industrial

 

 

Other

 

 

Home Equity

Lines of Credit

 

 

Second

Mortgages

 

 

Other

 

 

Unallocated

 

 

Total

 

Allowance for loan losses:

(In thousands)

 

Year Ended September 30, 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

 

$

1,364

 

 

$

523

 

 

$

20

 

 

$

5,903

 

 

$

49

 

 

$

369

 

 

$

615

 

 

$

21

 

 

$

122

 

 

$

267

 

 

$

23

 

 

$

819

 

 

$

10,095

 

Charge-offs

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(8,330

)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(62

)

 

 

(3

)

 

 

(1

)

 

 

-

 

 

 

(8,396

)

Recoveries

 

 

25

 

 

 

-

 

 

 

-

 

 

 

6

 

 

 

-

 

 

 

-

 

 

 

2

 

 

 

-

 

 

 

1

 

 

 

88

 

 

 

2

 

 

 

-

 

 

 

124

 

Provisions

 

 

278

 

 

 

(58

)

 

 

3

 

 

 

11,103

 

 

 

(2

)

 

 

142

 

 

 

(39

)

 

 

30

 

 

 

69

 

 

 

(156

)

 

 

5

 

 

 

(765

)

 

 

10,610

 

Ending balance

 

$

1,667

 

 

$

465

 

 

$

23

 

 

$

8,682

 

 

$

47

 

 

$

511

 

 

$

578

 

 

$

51

 

 

$

130

 

 

$

196

 

 

$

29

 

 

$

54

 

 

$

12,433

 

Ending balance: individually evaluated

   for impairment

 

$

-

 

 

$

-

 

 

$

-

 

 

$

227

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

81

 

 

$

-

 

 

$

-

 

 

$

308

 

Ending balance: collectively evaluated

   for impairment

 

$

1,667

 

 

$

465

 

 

$

23

 

 

$

8,455

 

 

$

47

 

 

$

511

 

 

$

578

 

 

$

51

 

 

$

130

 

 

$

115

 

 

$

29

 

 

$

54

 

 

$

12,125

 

Loans receivable:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance

 

$

242,090

 

 

$

65,703

 

 

$

3,110

 

 

$

495,398

 

 

$

7,517

 

 

$

67,767

 

 

$

116,584

 

 

$

10,142

 

 

$

17,128

 

 

$

10,711

 

 

$

2,851

 

 

 

 

 

 

$

1,039,001

 

Ending balance: individually evaluated

   for impairment

 

$

3,388

 

 

$

-

 

 

$

-

 

 

$

25,926

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

26

 

 

$

882

 

 

$

-

 

 

 

 

 

 

$

30,222

 

Ending balance: collectively evaluated

   for impairment

 

$

238,702

 

 

$

65,703

 

 

$

3,110

 

 

$

469,472

 

 

$

7,517

 

 

$

67,767

 

 

$

116,584

 

 

$

10,142

 

 

$

17,102

 

 

$

9,829

 

 

$

2,851

 

 

 

 

 

 

$

1,008,779

 

 

In assessing the adequacy of the ALLL, it is recognized that the process, methodology and underlying assumptions require a significant degree of judgment. The estimation of loan losses is not precise; the range of factors considered is wide and is significantly dependent upon management’s judgment, including the outlook and potential changes in the economic environment. Any unallocated portion of the ALLL in conjunction with the quarterly review and changes to the qualitative factors to adjust for the risk due to current economic conditions reflects management’s estimate of probable inherent but undetected losses within the portfolio due to uncertainties in economic conditions, regulatory requirements, delays in obtaining information, including unfavorable information about a borrower’s financial condition, the difficulty in identifying triggering events that correlate perfectly to subsequent loss rates, and risk factors that have not yet manifested themselves in loss allocation factors.

 

.

 

-20-


 

The increase in impaired loans with no specific allowance is primarily due to one commercial farmland loan of approximately $2.3 million. The following table presents impaired loans in the portfolio by class, segregated by those for which a specific allowance was required and those for which a specific allowance was not necessary, as of December 31, 2020 and September 30, 2020:

 

 

 

Impaired Loans with

Specific Allowance

 

 

Impaired

Loans

with No

Specific

Allowance

 

 

Total Impaired Loans

 

 

 

Recorded

Investment

 

 

Related

Allowance

 

 

Recorded

Investment

 

 

Recorded

Investment

 

 

Unpaid

Principal

Balance

 

 

 

(In thousands)

 

December 31, 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential mortgage

 

$

-

 

 

$

-

 

 

$

3,721

 

 

$

3,721

 

 

$

3,979

 

Commercial:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate

 

 

363

 

 

 

209

 

 

 

25,184

 

 

 

25,547

 

 

 

30,519

 

Farmland

 

 

2,287

 

 

 

317

 

 

 

-

 

 

 

2,287

 

 

 

2,287

 

   Commercial and industrial

 

 

-

 

 

 

-

 

 

 

549

 

 

 

549

 

 

 

549

 

Consumer:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Home equity lines of credit

 

 

-

 

 

 

-

 

 

 

73

 

 

 

73

 

 

 

77

 

Second mortgages

 

 

99

 

 

 

78

 

 

 

266

 

 

 

365

 

 

 

415

 

Total impaired loans

 

$

2,749

 

 

$

604

 

 

$

29,793

 

 

$

32,542

 

 

$

37,826

 

September 30, 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential mortgage

 

$

-

 

 

$

-

 

 

$

3,388

 

 

$

3,388

 

 

$

3,598

 

Commercial:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate

 

 

676

 

 

 

227

 

 

 

25,250

 

 

 

25,926

 

 

 

36,945

 

Consumer:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Home equity lines of credit

 

 

-

 

 

 

-

 

 

 

26

 

 

 

26

 

 

 

30

 

Second mortgages

 

 

101

 

 

 

81

 

 

 

781

 

 

 

882

 

 

 

949

 

Total impaired loans

 

$

777

 

 

$

308

 

 

$

29,445

 

 

$

30,222

 

 

$

41,522

 

 

The following table presents the average recorded investment in impaired loans in portfolio and related interest income recognized for the three months ended December 31, 2020 and 2019:

 

 

 

Three Months Ended December 31, 2020

 

 

 

Average

Impaired Loans

 

 

Interest Income

Recognized on

Impaired Loans

 

 

 

(In thousands)

 

Residential mortgage

 

$

3,483

 

 

$

15

 

Commercial:

 

 

 

 

 

 

 

 

Commercial real estate

 

 

25,727

 

 

 

105

 

Farmland

 

 

771

 

 

 

-

 

Commercial and industrial

 

 

185

 

 

 

2

 

Consumer:

 

 

 

 

 

 

 

 

Home equity lines of credit

 

 

74

 

 

 

-

 

Second mortgages

 

 

700

 

 

 

1

 

Total

 

$

30,940

 

 

$

123

 

 

-21-


 

 

 

Three Months Ended December 31, 2019

 

 

 

Average

Impaired Loans

 

 

Interest Income

Recognized on

Impaired Loans

 

 

 

(In thousands)

 

Residential mortgage

 

$

3,532

 

 

$

22

 

Commercial:

 

 

 

 

 

 

 

 

Commercial real estate

 

 

9,096

 

 

 

15

 

Consumer:

 

 

 

 

 

 

 

 

Home equity lines of credit

 

 

29

 

 

 

-

 

Second mortgages

 

 

845

 

 

 

9

 

Total

 

$

13,502

 

 

$

46

 

 

The following table presents the classes of the loan portfolio categorized as pass, special mention, substandard and doubtful within the Company’s internal risk rating system as of December 31, 2020 and September 30, 2020:

 

 

 

Pass

 

 

Special Mention

 

 

Substandard

 

 

Doubtful

 

 

Total

 

 

 

(In thousands)

 

December 31, 2020:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential mortgage

 

$

228,646

 

 

$

-

 

 

$

3,835

 

 

$

-

 

 

$

232,481

 

Construction and Development:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential and commercial

 

 

73,000

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

73,000

 

Land

 

 

3,648

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

3,648

 

Commercial:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate

 

 

392,611

 

 

 

46,790

 

 

 

39,407

 

 

 

-

 

 

 

478,808

 

Farmland

 

 

5,091

 

 

 

-

 

 

 

2,287

 

 

 

-

 

 

 

7,378

 

Multi-family

 

 

58,025

 

 

 

9,432

 

 

 

-

 

 

 

-

 

 

 

67,457

 

Commercial and industrial

 

 

94,914

 

 

 

6,277

 

 

 

661

 

 

 

-

 

 

 

101,852

 

Other

 

 

10,010

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

10,010

 

Consumer:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Home equity lines of credit

 

 

16,232

 

 

 

-

 

 

 

157

 

 

 

-

 

 

 

16,389

 

Second mortgages

 

 

7,966

 

 

 

75

 

 

 

1,056

 

 

 

-

 

 

 

9,097

 

Other

 

 

2,388

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

2,388

 

Total

 

$

892,531

 

 

$

62,574

 

 

$

47,403

 

 

$

-

 

 

$

1,002,508

 

 

 

 

Pass

 

 

Special Mention

 

 

Substandard

 

 

Doubtful

 

 

Total

 

 

 

(In thousands)

 

September 30, 2020:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential mortgage

 

$

238,610

 

 

$

-

 

 

$

3,480

 

 

$

-

 

 

$

242,090

 

Construction and Development:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential and commercial

 

 

65,703

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

65,703

 

Land

 

 

3,110

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

3,110

 

Commercial:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate

 

 

422,143

 

 

 

46,892

 

 

 

26,363

 

 

 

-

 

 

 

495,398

 

Farmland

 

 

7,517

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

7,517

 

Multi-family

 

 

58,285

 

 

 

9,482

 

 

 

-

 

 

 

-

 

 

 

67,767

 

Commercial and industrial

 

 

110,099

 

 

 

6,368

 

 

 

117

 

 

 

-

 

 

 

116,584

 

Other

 

 

10,142

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

10,142

 

Consumer:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Home equity lines of credit

 

 

16,969

 

 

 

-

 

 

 

159

 

 

 

-

 

 

 

17,128

 

Second mortgages

 

 

9,573

 

 

 

76

 

 

 

1,062

 

 

 

-

 

 

 

10,711

 

Other

 

 

2,851

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

2,851

 

Total

 

$

945,002

 

 

$

62,818

 

 

$

31,181

 

 

$

-

 

 

$

1,039,001

 

 

-22-


 

The following table presents loans that are no longer accruing interest as of December 31, 2020 and September 30, 2020, by portfolio class:

 

 

 

December 31,

2020

 

 

September 30,

2020

 

 

 

(In thousands)

 

Non-accrual loans:

 

 

 

 

 

 

 

 

Residential mortgage

 

$

1,916

 

 

$

2,036

 

Commercial:

 

 

 

 

 

 

 

 

Commercial real estate

 

 

14,042

 

 

 

14,414

 

Consumer:

 

 

 

 

 

 

 

 

Home equity lines of credit

 

 

73

 

 

 

26

 

Second mortgages

 

 

209

 

 

 

254

 

Total non-accrual loans

 

$

16,240

 

 

$

16,730

 

 

Under the Bank’s loan policy, once a loan has been placed on non-accrual status, we do not resume interest accruals until the loan has been brought current and has maintained a current payment status for not less than six consecutive months. Interest income that would have been recognized on non-accrual loans had they been current in accordance with their original terms was approximately $138,000 for the three months ended December 31, 2020, and approximately $17,000 for the three months ended December 31, 2019.  At December 31, 2020 and September 30, 2020, there were approximately $775,000 and $58,000, respectively, of loans past due 90 days or more and still accruing interest.    

Management monitors the performance and credit quality of the loan portfolio by analyzing the age of the portfolio and categorizing each loan as “current”, meaning payment is received from a borrower by the scheduled due date, or by the length of time a scheduled payment is past due. The following table presents the classes of the loan portfolio categorized by the aging categories described above as of December 31, 2020 and September 30, 2020:

 

 

 

Current

 

 

30-59 Days

Past Due

 

 

60-89 Days

Past Due

 

 

90 Days

and More

Past Due

 

 

Total Past

Due

 

 

Total

Loans

Receivable

 

 

Loans Receivable >

90 Days and

Accruing

 

 

 

(In thousands)

 

December 31, 2020:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential mortgage

 

$

228,711

 

 

$

1,678

 

 

$

520

 

 

$

1,572

 

 

$

3,770

 

 

$

232,481

 

 

$

710

 

Construction and Development:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential and commercial

 

 

73,000

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

73,000

 

 

 

-

 

Land

 

 

3,648

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

3,648

 

 

 

-

 

Commercial:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate

 

 

464,949

 

 

 

13,859

 

 

 

-

 

 

 

-

 

 

 

13,859

 

 

 

478,808

 

 

 

-

 

Farmland

 

 

5,091

 

 

 

2,287

 

 

 

-

 

 

 

-

 

 

 

2,287

 

 

 

7,378

 

 

 

-

 

Multi-family

 

 

67,457

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

67,457

 

 

 

-

 

Commercial and industrial

 

 

98,898

 

 

 

2,954

 

 

 

-

 

 

 

-

 

 

 

2,954

 

 

 

101,852

 

 

 

-

 

Other

 

 

10,010

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

10,010

 

 

 

-

 

Consumer:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Home equity lines of credit

 

 

16,230

 

 

 

86

 

 

 

-

 

 

 

73

 

 

 

159

 

 

 

16,389

 

 

 

-

 

Second mortgages

 

 

8,669

 

 

 

197

 

 

 

54

 

 

 

177

 

 

 

428

 

 

 

9,097

 

 

 

65

 

Other

 

 

2,387

 

 

 

1

 

 

 

-

 

 

 

-

 

 

 

1

 

 

 

2,388

 

 

 

-

 

Total

 

$

979,050

 

 

$

21,062

 

 

$

574

 

 

$

1,822

 

 

$

23,458

 

 

$

1,002,508

 

 

$

775

 

-23-


 

 

 

 

Current

 

 

30-59 Days

Past Due

 

 

60-89 Days

Past Due

 

 

Greater than

90 Days

Past Due

 

 

Total Past

Due

 

 

Total

Loans

Receivable

 

 

Loans Receivable >

90 Days and

Accruing

 

 

 

(In thousands)

 

September 30, 2020:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential mortgage

 

$

239,623

 

 

$

68

 

 

$

694

 

 

$

1,705

 

 

$

2,467

 

 

$

242,090

 

 

$

-

 

Construction and Development:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential and commercial

 

 

65,703

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

65,703

 

 

 

-

 

Land

 

 

3,110

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

3,110

 

 

 

-

 

Commercial:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate

 

 

495,087

 

 

 

-

 

 

 

-

 

 

 

311

 

 

 

311

 

 

 

495,398

 

 

 

-

 

Farmland

 

 

7,517

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

7,517

 

 

 

-

 

Multi-family

 

 

67,767

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

67,767

 

 

 

-

 

Commercial and industrial

 

 

116,584

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

116,584

 

 

 

-

 

Other

 

 

10,142

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

10,142

 

 

 

-

 

Consumer:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Home equity lines of credit

 

 

17,080

 

 

 

-

 

 

 

-

 

 

 

48

 

 

 

48

 

 

 

17,128

 

 

 

48

 

Second mortgages

 

 

10,325

 

 

 

157

 

 

 

33

 

 

 

196

 

 

 

386

 

 

 

10,711

 

 

 

10

 

Other

 

 

2,850

 

 

 

-

 

 

 

1

 

 

 

-

 

 

 

1

 

 

 

2,851

 

 

 

-

 

Total

 

$

1,035,788

 

 

$

225

 

 

$

728

 

 

$

2,260

 

 

$

3,213

 

 

$

1,039,001

 

 

$

58

 

 

Restructured loans deemed to be TDRs are typically the result of an extension of the loan maturity date or a reduction of the interest rate of the loan to a rate that is below market, a combination of rate and maturity extension, or by other means, including covenant modifications, forbearance and other concessions. However, the Bank generally restructures loans by modifying the payment structure to require payments of interest only for a specified period or by reducing the actual interest rate. Once a loan becomes a TDR, it will continue to be reported as a TDR during the term of the restructure.

The Company had 28 and 26 loans classified as TDRs at December 31, 2020 and September 30, 2020, respectively, with an aggregate outstanding balance of $24.4 million and $21.7 million, respectively. At December 31, 2020, these loans were also classified as impaired. 20 of the TDR loans continue to perform under the restructured terms through December 31, 2020 and we continued to accrue interest on such loans through such date.   

 

Loans that have been classified as TDRs have modified payment terms and in some cases interest rate from the original agreements and allowed the borrowers, who were experiencing financial difficulty, to make interest only payments for a period of time in order to relieve some of their overall cash flow burden. Some loan modifications classified as TDRs may not ultimately result in the full collection of principal and interest, as modified, and could result in potential incremental losses. These potential incremental losses have been factored into our overall estimate of the ALLL. The level of any defaults will likely be affected by future economic conditions. A default on a TDR loan for purposes of this disclosure occurs when the borrower is 90 days past due or a foreclosure or repossession of the applicable collateral has occurred.  

-24-


 

TDRs may arise in cases where, due to financial difficulties experienced by the borrower, the Company obtains through physical possession one or more collateral assets in satisfaction of all or part of an existing credit. Once possession is obtained, the Company reclassifies the appropriate portion of the remaining balance of the credit from loans to other real estate owned (“OREO”), which is included within other assets in the Consolidated Statements of Financial Condition. For any residential real estate property collateralizing a consumer mortgage loan, the Company is considered to possess the related collateral only if legal title is obtained upon completion of foreclosure, or the borrower conveys all interest in the residential real estate property to the Company through completion of a deed in lieu of foreclosure or similar legal agreement. Excluding OREO, the Company had $624,000 and $175,000 of residential real estate properties in the process of foreclosure at December 31, 2020 and September 30, 2020, respectively. However, the Company has temporarily suspended collection and foreclosure efforts on past due loans in accordance with CARES Act guidance.  The following table presents total TDRs as of December 31, 2020 and September 30, 2020:

 

 

 

Total Troubled Debt

Restructurings

 

 

Troubled Debt Restructured

Loans That Have Defaulted on

Modified Terms Within The Past

12 Months

 

 

 

Number of

Loans

 

 

Recorded

Investment

 

 

Number of

Loans

 

 

Recorded

Investment

 

 

 

(Dollars in thousands)

 

December 31, 2020:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential mortgage

 

 

17

 

 

$

3,359

 

 

 

7

 

 

$

1,553

 

Commercial:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate

 

 

5

 

 

 

18,021

 

 

 

1

 

 

 

6,591

 

Farmland

 

 

1

 

 

 

2,287

 

 

 

-

 

 

 

-

 

Commercial and industrial

 

 

1

 

 

 

549

 

 

 

-

 

 

 

-

 

Consumer:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Second mortgages

 

 

4

 

 

 

156

 

 

 

-

 

 

 

-

 

Total

 

 

28

 

 

$

24,372

 

 

 

8

 

 

$

8,144

 

September 30, 2020:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential mortgage

 

 

17

 

 

$

3,435

 

 

 

7

 

 

$

1,617

 

Commercial:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate

 

 

5

 

 

 

18,091

 

 

 

1

 

 

 

6,652

 

Consumer:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Second mortgages

 

 

4

 

 

 

161

 

 

 

-

 

 

 

-

 

Total

 

 

26

 

 

$

21,687

 

 

 

8

 

 

$

8,269

 

 

The following table reports the performing status of all TDR loans. The performing status is determined by a loan’s compliance with the modified terms:

 

 

 

December 31, 2020

 

 

September 30, 2020

 

 

 

Performing

 

 

Non-Performing

 

 

Performing

 

 

Non-Performing

 

 

 

(In thousands)

 

Residential mortgage

 

$

1,806

 

 

$

1,553

 

 

$

1,818

 

 

$

1,617

 

Commercial:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate

 

 

11,431

 

 

 

6,591

 

 

 

11,439

 

 

 

6,652

 

Farmland

 

 

2,287

 

 

 

-

 

 

 

-

 

 

 

-

 

Commercial and industrial

 

 

549

 

 

 

-

 

 

 

-

 

 

 

-

 

Consumer:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Second mortgages

 

 

156

 

 

 

-

 

 

 

161

 

 

 

-

 

Total

 

$

16,229

 

 

$

8,144

 

 

$

13,418

 

 

$

8,269

 

-25-


 

 

 The following table shows the new TDRs for the three months ended December 31, 2020 and 2019:

 

 

 

 

For the Three Months Ended December 31,

 

 

 

2020

 

 

2019

 

 

 

Number of

Contracts

 

 

Pre-

Modifications

Outstanding

Recorded

Investment

 

 

Post-

Modification

Outstanding

Recorded

Investment

 

 

Number of

Contracts

 

 

Pre-

Modifications

Outstanding

Recorded

Investment

 

 

Post-

Modification

Outstanding

Recorded

Investment

 

 

 

(In thousands)

 

Troubled Debt Restructurings:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential mortgage

 

 

-

 

 

$

-

 

 

$

-

 

 

 

1

 

 

$

207

 

 

$

207

 

Commercial:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate

 

 

-

 

 

$

-

 

 

$

-

 

 

 

1

 

 

$

295

 

 

$

295

 

Farmland

 

 

1

 

 

$

2,287

 

 

$

2,287

 

 

 

-

 

 

$

-

 

 

$

-

 

Commercial and industrial

 

 

1

 

 

$

549

 

 

$

549

 

 

 

-

 

 

$

-

 

 

$

-

 

Total troubled debt restructurings

 

 

2

 

 

$

2,836

 

 

$

2,836

 

 

 

2

 

 

$

502

 

 

$

502

 

 

Under Section 4013 of the CARES Act, and separately based upon regulatory guidance promulgated by federal banking regulators (collectively “Interagency Statement”), qualifying short-term loan modifications resulting in payment deferrals that are attributable to the adverse impact of COVID-19, are not considered to be TDRs. As such, the applicable loans are reported as current with regard to payment status and continue to accrue interest during the payment deferral period. At December 31, 2020, the Company had 16 COVID-19 modified loan deferrals totaling approximately $68.9 million. At September 30, 2020, the Company had 43 COVID-19 modified loan deferrals totaling approximately $144.8 million. 


-26-


 

The following tables set forth the composition of these loans by loan segments as of December 31, 2020 and September 30, 2020:

 

 

December 31, 2020

 

 

Number of Loans

 

 

Loan Deferment Exposure

 

 

Gross Loans December 31, 2020

 

 

Percentage of Gross Loans on Deferral

 

 

 

 

 

 

(Dollars in thousands)

 

 

 

 

 

Residential mortgage

 

5

 

 

$

934

 

 

$

232,481

 

 

 

0.09

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Construction and Development:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential and commercial

 

-

 

 

 

-

 

 

 

73,000

 

 

 

0.00

%

Land loans

 

-

 

 

 

-

 

 

 

3,648

 

 

 

0.00

%

Total Construction and Development

 

-

 

 

 

-

 

 

 

76,648

 

 

 

0.00

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate

 

7

 

 

 

67,082

 

 

 

478,808

 

 

 

6.69

%

Farmland

 

-

 

 

 

-

 

 

 

7,378

 

 

 

0.00

%

Multi-family

 

1

 

 

 

717

 

 

 

67,457

 

 

 

0.08

%

Commercial and industrial

 

1

 

 

 

22

 

 

 

101,852

 

 

 

0.00

%

Other

 

-

 

 

 

-

 

 

 

10,010

 

 

 

0.00

%

Total Commercial

 

9

 

 

 

67,821

 

 

 

665,505

 

 

 

6.77

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consumer:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Home equity lines of credit

 

1

 

 

 

131

 

 

 

16,389

 

 

 

0.01

%

Second mortgages

 

1

 

 

 

17

 

 

 

9,097

 

 

 

0.00

%

Other

 

-

 

 

 

-

 

 

 

2,388

 

 

 

0.00

%

Total Consumer

 

2

 

 

 

148

 

 

 

27,874

 

 

 

0.01

%

Total loans

 

16

 

 

$

68,903

 

 

$

1,002,508

 

 

 

6.87

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2020

 

 

Number of Loans

 

 

Loan Deferment Exposure

 

 

Gross Loans September 30, 2020

 

 

Percentage of Gross Loans on Deferral

 

 

 

 

 

 

(Dollars in thousands)

 

 

 

 

 

Residential mortgage

 

5

 

 

$

1,288

 

 

$

242,090

 

 

 

0.12

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Construction and Development:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential and commercial

 

-

 

 

 

-

 

 

 

65,703

 

 

 

0.00

%

Land loans

 

-

 

 

 

-

 

 

 

3,110

 

 

 

0.00

%

Total Construction and Development

 

-

 

 

 

-

 

 

 

68,813

 

 

 

0.00

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate

 

21

 

 

 

131,348

 

 

 

495,398

 

 

 

12.64

%

Farmland

 

1

 

 

 

2,288

 

 

 

7,517

 

 

 

0.22

%

Multi-family

 

2

 

 

 

3,718

 

 

 

67,767

 

 

 

0.36

%

Commercial and industrial

 

10

 

 

 

5,547

 

 

 

116,584

 

 

 

0.53

%

Other

 

-

 

 

 

-

 

 

 

10,142

 

 

 

0.00

%

Total Commercial

 

34

 

 

 

142,901

 

 

 

697,408

 

 

 

13.75

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consumer:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Home equity lines of credit

 

3

 

 

 

579

 

 

 

17,128

 

 

 

0.06

%

Second mortgages

 

1

 

 

 

17

 

 

 

10,711

 

 

 

0.00

%

Other

 

-

 

 

 

-

 

 

 

2,851

 

 

 

0.00

%

Total Consumer

 

4

 

 

 

596

 

 

 

30,690

 

 

 

0.06

%

Total loans

 

43

 

 

$

144,785

 

 

$

1,039,001

 

 

 

13.94

%

 

 

-27-


 

Note 9 - Regulatory Matters

 

Regulatory Capital Requirements

The Bank is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank’s assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. The Bank’s capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk-weightings and other factors.

In July 2013, the respective U.S. federal banking agencies issued final rules implementing Basel III and the Dodd-Frank Act capital requirements to be fully phased in on a global basis on January 1, 2019. The regulations establish a new tangible common equity capital requirement, increase the minimum requirement for the current Tier 1 risk-weighted asset (“RWA”) ratio, phase out certain kinds of intangibles treated as capital and certain types of instruments and change the risk weightings of certain assets used to determine required capital ratios. The new common equity Tier 1 capital component requires capital of the highest quality predominantly composed of retained earnings and common stock instruments. For community banks, such as Malvern Bank, a common equity Tier 1 capital ratio of 4.5% became effective on January 1, 2015. The new capital rules also increased the minimum Tier 1 capital ratio from 4.0% to 6.0% beginning on January 1, 2015. The rules also establish a capital conservation buffer of 2.5% above the new regulatory minimum capital requirements, which must consist entirely of common equity Tier 1 capital and would result in the following minimum ratios: (1) a common equity Tier 1 capital ratio of 7.0%, (2) a Tier 1 capital ratio of 8.5%, and (3) a total capital ratio of 10.5%. The new capital conservation buffer requirement began to be phased in on January 1, 2016 at 0.625% of risk-weighted assets and increased by that amount each year until it became fully implemented at 2.5% on January 1, 2019. An institution is also subject to limitations on paying dividends, engaging in share repurchases, and paying discretionary bonuses if its capital level falls below the buffer amount. These limitations establish a maximum percentage of eligible retained income that could be utilized for such actions.

Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the table below) of tangible and core capital (as defined in the regulations) to total adjusted tangible assets (as defined) and of risk-based capital (as defined) to risk-weighted assets (as defined).  

As of December 31, 2020, the Company’s and the Bank’s current capital levels exceed the required capital amounts to be considered “well capitalized” and they also meet the fully-phased in minimum capital requirements, including the related capital conservation buffers, as required by the Basel III capital rules.   

-28-


 

The following table summarizes the Company’s compliance with applicable regulatory capital requirements as of December 31, 2020 and September 30, 2020:

 

 

 

Actual

 

 

For Capital

Adequacy Purposes

 

 

To be Well

Capitalized

Under Prompt

Corrective Action

Provisions

 

 

Amount

 

 

Ratio

 

 

Amount

 

 

Ratio

 

 

Amount

 

Ratio

 

 

(Dollars in thousands)

As of December 31, 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tier 1 Leverage (Core) Capital (to

   adjusted assets)

 

$

144,059

 

 

 

11.76

%

 

$

48,991

 

 

 

4.00

%

 

N/A

 

N/A

Common Equity Tier 1 Capital (to risk

   weighted assets)

 

 

144,059

 

 

 

14.30

%

 

 

45,347

 

 

 

4.50

%

 

N/A

 

N/A

Tier 1 Capital (to risk weighted assets)

 

 

144,059

 

 

 

14.30

%

 

 

60,462

 

 

 

6.00

%

 

N/A

 

N/A

Total Risk Based Capital (to risk

   weighted assets)

 

 

151,478

 

 

 

18.01

%

 

 

80,616

 

 

 

8.00

%

 

N/A

 

N/A

As of September 30, 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tier 1 Leverage (Core) Capital (to

   adjusted assets)

 

$

141,681

 

 

 

11.63

%

 

$

48,473

 

 

 

4.00

%

 

N/A

 

N/A

Common Equity Tier 1 Capital (to risk

   weighted assets)

 

 

141,681

 

 

 

14.00

%

 

 

45,528

 

 

 

4.50

%

 

N/A

 

N/A

Tier 1 Capital (to risk weighted assets)

 

 

141,681

 

 

 

14.00

%

 

 

60,704

 

 

 

6.00

%

 

N/A

 

N/A

Total Risk Based Capital (to risk

   weighted assets)

 

 

178,972

 

 

 

17.69

%

 

 

80,939

 

 

 

8.00

%

 

N/A

 

N/A

 

The following table summarizes the Bank’s compliance with applicable regulatory capital requirements as of December 31, 2020 and September 30, 2020:

 

 

 

Actual

 

 

For Capital

Adequacy Purposes

 

 

To be Well

Capitalized

Under Prompt

Corrective

Action Provisions

 

 

 

Amount

 

 

Ratio

 

 

Amount

 

 

Ratio

 

 

Amount

 

 

Ratio

 

 

 

(Dollars in thousands)

 

As of December 31, 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tier 1 Leverage (Core) Capital (to

   adjusted assets)

 

$

158,399

 

 

 

12.95

%

 

$

48,929

 

 

 

4.00

%

 

$

61,162

 

 

 

5.00

%

Common Equity Tier 1 Capital (to risk

   weighted assets)

 

 

158,399

 

 

 

15.74

%

 

 

45,272

 

 

 

4.50

%

 

 

65,393

 

 

 

6.50

%

Tier 1 Capital (to risk weighted assets)

 

 

158,399

 

 

 

15.74

%

 

 

60,363

 

 

 

6.00

%

 

 

80,484

 

 

 

8.00

%

Total Risk Based Capital (to risk

   weighted assets)

 

 

170,982

 

 

 

17.00

%

 

 

80,484

 

 

 

8.00

%

 

 

100,605

 

 

 

10.00

%

As of September 30, 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tier 1 Leverage (Core) Capital (to

   adjusted assets)

 

$

155,575

 

 

 

12.78

%

 

$

48,685

 

 

 

4.00

%

 

$

60,856

 

 

 

5.00

%

Common Equity Tier 1 Capital (to risk

   weighted assets)

 

 

155,575

 

 

 

15.40

%

 

 

45,459

 

 

 

4.50

%

 

 

65,663

 

 

 

6.50

%

Tier 1 Capital (to risk weighted assets)

 

 

155,575

 

 

 

15.40

%

 

 

60,612

 

 

 

6.00

%

 

 

80,816

 

 

 

8.00

%

Total Risk Based Capital (to risk

   weighted assets)

 

 

168,090

 

 

 

16.64

%

 

 

80,816

 

 

 

8.00

%

 

 

101,020

 

 

 

10.00

%

 

 

-29-


 

Note 10 – Derivatives and Hedging Activities

The Company is exposed to certain risks arising from both its business operations and economic conditions.  The Company principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. The Company manages economic risks, including interest rate, liquidity, and credit risk primarily by managing the amount, sources, and duration of its debt funding and the use of derivative financial instruments.  Specifically, the Company enters into derivative financial instruments to manage exposures that arise from business activities that result in the payment of future uncertain cash amounts, the value of which are determined by interest rates.

The Company’s objectives in using interest rate derivatives are to add stability to interest expense and to manage its exposure to interest rate movements. To accomplish this objective, the Company primarily uses interest rate swaps as part of its interest rate risk management strategy.  Interest rate swaps designated as cash flow hedges involve the receipt of variable amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount.

The effective portion of changes in the fair value of derivatives designated and that qualify as cash flow hedges is recorded in accumulated other comprehensive income (loss) and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings.  At December 31, 2020, such derivatives were used to hedge the variable cash flows associated with FHLB advances.  

Amounts reported in accumulated other comprehensive income (loss) related to derivatives will be reclassified to interest expense as interest payments are made on the Company’s variable-rate debt. During the next twelve months, the Company estimates approximately $787,000 to be reclassified to earnings as an increase to interest expense. The Company is hedging its exposure to the variability in future cash flows for forecasted transactions over a maximum period of twenty months (excluding forecasted transactions related to the payment of variable interest on existing financial instruments).

The Company executes interest rate swaps with commercial banking customers to facilitate their respective risk management strategies. Those interest rate swaps are simultaneously hedged by offsetting interest rate swaps that the Company executes with a third party, such that the Company minimizes its net risk exposure resulting from such transactions.  These derivatives are not designated as hedges and are not speculative.  Rather, these derivatives result from a service the Company provides to certain customers. As the interest rate swaps associated with this program do not meet the hedge accounting requirements, changes in the fair value of both the customer swaps and the offsetting swaps are recognized directly in earnings. 

The tables below present the fair value of the Company’s derivative financial instruments as well as their classification on the Consolidated Statements of Financial Condition as of December 31, 2020 and September 30, 2020:

 

`

 

December 31, 2020

 

 

Asset derivatives

 

Liability derivatives

 

 

Notional Amount

 

 

Fair Value

 

 

Statement of Financial Condition Location

 

Notional Amount

 

 

Fair Value

 

 

Statement of Financial Condition Location

 

 

(In thousands)

Derivatives designated as a hedging instrument:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate swap agreement

 

$

-

 

 

$

-

 

 

Other assets

 

$

90,000

 

 

$

1,017

 

 

Other liabilities

Derivatives not designated as a hedging instrument:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate swap agreement

 

$

45,060

 

 

$

7,488

 

 

Other assets

 

$

45,060

 

 

$

7,492

 

 

Other liabilities

-30-


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2020

 

 

Asset derivatives

 

Liability derivatives

 

 

Notional Amount

 

 

Fair Value

 

 

Statement of Financial Condition Location

 

Notional Amount

 

 

Fair Value

 

 

Statement of Financial Condition Location

 

 

(In thousands)

Derivatives designated as a hedging instrument:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate swap agreement

 

$

-

 

 

$

-

 

 

Other assets

 

$

90,000

 

 

$

1,291

 

 

Other liabilities

Derivatives not designated as a hedging instrument:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate swap agreement

 

$

45,162

 

 

$

8,752

 

 

Other assets

 

$

45,162

 

 

$

8,756

 

 

Other liabilities

 

 

 

-31-


 

The tables below present the derivative assets and liabilities offsetting as of December 31, 2020 and September 30, 2020:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Offsetting of Derivative Assets

(In thousands)

 

as of December 31, 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross Amounts Not Offset in the Statements of Financial Condition

 

 

Gross Amounts of Recognized Assets

 

Gross Amounts Offset in the Statement of Financial Condition

 

Net Amounts of Assets presented in the Statement of Financial Condition

 

Financial Instruments

 

Cash Collateral Received

 

Net Amount

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivatives

$

7,488

 

$

-

 

$

7,488

 

$

-

 

$

-

 

$

7,488

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Offsetting of Derivative Liabilities

(In thousands)

 

as of December 31, 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross Amounts Not Offset in the Statements of Financial Condition

 

 

Gross Amounts of Recognized Liabilities

 

Gross Amounts Offset in the Statement of Financial Condition

 

Net Amounts of Liabilities presented in the Statement of Financial Condition

 

Financial Instruments

 

Cash Collateral Posted

 

Net Amount

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivatives

$

8,509

 

$

-

 

$

8,509

 

$

1,230

 

$

12,857

 

$

(5,578

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Offsetting of Derivative Assets

(In thousands)

 

as of September 30, 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross Amounts Not Offset in the Statements of Financial Condition

 

 

Gross Amounts of Recognized Assets

 

Gross Amounts Offset in the Statement of Financial Condition

 

Net Amounts of Assets presented in the Statement of Financial Condition

 

Financial Instruments

 

Cash Collateral Received

 

Net Amount

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivatives

$

8,752

 

$

-

 

$

8,752

 

$

-

 

$

-

 

$

8,752

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Offsetting of Derivative Liabilities

(In thousands)

 

as of September 30, 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross Amounts Not Offset in the Statements of Financial Condition

 

 

Gross Amounts of Recognized Liabilities

 

Gross Amounts Offset in the Statement of Financial Condition

 

Net Amounts of Liabilities presented in the Statement of Financial Condition

 

Financial Instruments

 

Cash Collateral Posted

 

Net Amount

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivatives

$

10,047

 

$

-

 

$

10,047

 

$

1,498

 

$

12,857

 

$

(4,308

)

 

 

The tables below present the net gains (losses) recorded in accumulated other comprehensive loss and the Consolidated Statements of Operations relating to the cash flow derivative instruments for the three months ended December 31, 2020 and 2019:

 

 

 

Three Months Ended December 31, 2020

 

 

 

 

Amount of Loss Recognized

in OCI on Derivative

 

 

Amount of Loss

Reclassified

from OCI to

Interest Expense

 

 

 

 

(In thousands)

 

 

Interest rate swap agreements

 

$

(8

)

 

$

(280

)

 

Total derivatives

 

 

(8

)

 

 

(280

)

 

-32-


 

 

 

 

Three Months Ended December 31, 2019

 

 

 

 

Amount of Gain

Recognized

in OCI on Derivative

 

 

Amount of Loss

Reclassified

from OCI to

Interest Expense

 

 

 

 

(In thousands)

 

 

Interest rate swap agreements

 

$

77

 

 

$

(14

)

 

Total derivatives

 

 

77

 

 

 

(14

)

 

 

    

          

 

 

The tables below present the effect of the Company’s derivative financial instruments on the Consolidated Statements of Operations for the three months ended December 31, 2020 and 2019:

 

 

 

 

Three Months Ended December 31, 2020

 

 

 

 

Consolidated Statements of Operations

 

Amount of Gain (Loss) Recognized in Income on derivatives

 

 

 

 

(In thousands)

 

Derivatives not designated as a hedging instrument:

 

 

 

Interest rate swap agreement

 

 

Other income

 

$

1

 

Total

 

 

 

 

$

1

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended December 31, 2019

 

 

 

 

Consolidated Statements of Operations

 

Amount of Loss Recognized in Income on derivatives

 

 

 

 

(In thousands)

 

Derivatives not designated as a hedging instrument:

 

 

 

Interest rate swap agreement

 

 

Other income

 

$

(3

)

Total

 

 

 

 

$

(3

)

 

The Company has agreements with each of its derivative counterparties that contain a provision providing that if the Company defaults on any of its indebtedness, including defaults where repayment of the indebtedness has not been accelerated by the lender, then the Company could also be declared in default on its derivative obligations.

 

At December 31, 2020 and September 30, 2020, the fair value of derivatives was in a net liability position, which includes accrued interest but excludes any adjustment for nonperformance risk, related to these agreements. There were no adjustments for nonperformance risk at December 31, 2020 and September 30, 2020. At December 31, 2020 and September 30, 2020, the Company has minimum collateral posting thresholds with certain of its derivative counterparties and has posted collateral of $12.9 million and $12.9 million, respectively, against its obligations under these agreements.  If the Company had breached any of these provisions at December 31, 2020, it could have been required to settle its obligations under the agreements at the termination value and would have been required to pay any additional amounts due in excess of amounts previously posted as collateral with the respective counterparty.

Note 11 - Fair Value Measurements

The Company follows FASB ASC Topic 820 Fair Value Measurement to record fair value adjustments to certain assets and to determine fair value disclosures for the Company’s financial instruments. Investment and mortgage-backed securities available for sale are recorded at fair value on a recurring basis. Additionally, from time to time, the Company may be required to record at fair value other assets on a nonrecurring basis, such as impaired loans, real estate owned and certain other assets. These nonrecurring fair value adjustments typically involve application of lower-of-cost-or-market accounting or write-downs of individual assets.

The Company groups its assets at fair value in three levels, based on the markets in which the assets are traded and the reliability of the assumptions used to determine fair value. These levels are:

Level 1— valuation is based upon quoted prices for identical instruments traded in active markets.

Level 2—valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market.

-33-


 

Level 3—valuation is generated from model-based techniques that use significant assumptions not observable in the market.  These unobservable assumptions reflect the Company’s own estimates of assumptions that market participants would use in pricing the asset.

The Company bases its fair values on the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. It is our policy to maximize the use of observable inputs and minimize the use of unobservable inputs when developing fair value measurements, in accordance with the fair value hierarchy.

Fair value measurements for assets where there exists limited or no observable market data and, therefore, are based primarily upon the Company’s or other third-party’s estimates, are often calculated based on the characteristics of the asset, the economic and competitive environment and other factors. Therefore, the results cannot be determined with precision and may not be realized in an actual sale or immediate settlement of the asset. Additionally, there may be inherent weaknesses in any calculation technique, and changes in the underlying assumptions used, including discount rates and estimates of future cash flows, could significantly affect the results of current or future valuations.

The Company monitors and evaluates available data to perform fair value measurements on an ongoing basis and recognizes transfers among the levels of the fair value hierarchy as of the date event or a change in circumstances that affects the valuation method chosen. There were no changes in valuation technique or transfers between levels at December 31, 2020 or September 30, 2020.

The tables below present the balances of assets measured at fair value on a recurring basis as of December 31, 2020 and September 30, 2020:

 

 

 

December 31, 2020

 

 

 

Total

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

 

(In thousands)

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investment securities available for sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Debt securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government agencies

 

$

5,020

 

 

$

-

 

 

$

5,020

 

 

$

-

 

State and municipal obligations

 

 

2,678

 

 

 

-

 

 

 

2,678

 

 

 

-

 

Single issuer trust preferred security

 

 

908

 

 

 

-

 

 

 

908

 

 

 

-

 

Corporate debt securities

 

 

25,098

 

 

 

-

 

 

 

25,098

 

 

 

-

 

Mutual funds

 

 

1,520

 

 

 

1,020

 

 

 

-

 

 

 

500

 

Total investment securities available for sale

 

$

35,224

 

 

$

1,020

 

 

$

33,704

 

 

$

500

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivative instruments

 

$

7,488

 

 

$

-

 

 

$

7,488

 

 

$

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivative instruments

 

$

8,509

 

 

$

-

 

 

$

8,509

 

 

$

-

 

-34-


 

 

 

 

September 30, 2020

 

 

 

Total

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

 

(In thousands)

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investment securities available for sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Debt securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government agencies

 

$

5,040

 

 

$

-

 

 

$

5,040

 

 

$

-

 

State and municipal obligations

 

 

3,105

 

 

 

-

 

 

 

3,105

 

 

 

-

 

Single issuer trust preferred security

 

 

925

 

 

 

-

 

 

 

925

 

 

 

-

 

Corporate debt securities

 

 

20,948

 

 

 

-

 

 

 

20,948

 

 

 

-

 

Mutual fund

 

 

1,523

 

 

 

1,023

 

 

 

-

 

 

 

500

 

Total investment securities available for sale

 

$

31,541

 

 

$

1,023

 

 

$

30,018

 

 

$

500

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivative instruments

 

$

8,752

 

 

$

-

 

 

$

8,752

 

 

$

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivative instruments

 

$

10,047

 

 

$

-

 

 

$

10,047

 

 

$

-

 

 

The following tables present additional information about the securities available-for-sale measured at fair value on a recurring basis and for which the Company utilized significant unobservable inputs (Level 3 inputs) to determine fair value for the three months ended December 31, 2020 and December 31, 2019.

 

 

Fair value measurements

 

 

 

using significant

 

 

 

unobservable inputs

 

 

 

(Level 3)

 

 

 

(In thousands)

    Balance, October 1, 2020

$

500

 

 

Payments received

 

-

 

 

Total gains or losses (realized/unrealized)

 

 

 

 

Included in earnings

 

-

 

 

Included in other comprehensive income

 

-

 

 

Purchases

 

-

 

 

Transfers in and/or out of Level 3

 

-

 

 

    Balance, December 31, 2020

$

500

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair value measurements

 

 

 

using significant

 

 

 

unobservable inputs

 

 

 

(Level 3)

 

 

 

(In thousands)

    Balance, October 1, 2019

$

250

 

 

Payments received

 

-

 

 

Total gains or losses (realized/unrealized)

 

 

 

 

Included in earnings

 

-

 

 

Included in other comprehensive income

 

-

 

 

Purchases

 

250

 

 

Transfers in and/or out of Level 3

 

-

 

 

    Balance, December 31, 2019

$

500

 

 

The majority of the Company’s available for sale investment securities are reported at fair value utilizing Level 2 inputs. For these securities, the Company obtains fair value measurements from an independent pricing service. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the securities’ terms and conditions, among other

-35-


 

things.  From time to time, the Company validates prices supplied by the independent pricing service by comparison to prices obtained from third-party sources or derived using internal models.

 

For assets measured at fair value on a nonrecurring basis that were still held at the end of the period, the following tables provide the level of valuation assumptions used to determine each adjustment and the carrying value of the related individual assets or portfolios at December 31, 2020 and September 30, 2020:

 

 

 

December 31, 2020

 

 

 

Total

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

 

(In thousands)

 

Other real estate owned

 

$

5,796

 

 

$

-

 

 

$

-

 

 

$

5,796

 

Impaired loans(1)

 

 

9,597

 

 

 

-

 

 

 

-

 

 

 

9,597

 

Total

 

$

15,393

 

 

$

-

 

 

$

-

 

 

$

15,393

 

 

 

 

 

December 31, 2020

 

 

Fair Value at

December 31, 2020

 

 

Valuation Technique

 

Unobservable Input

 

Range/(Weighted

Average)

 

 

(Dollars in thousands)

Other real estate owned

 

$

5,796

 

 

Appraisal of Collateral(2)

 

Collateral discount(3)

 

0%/(0%)

Impaired loans(1)

 

 

9,597

 

 

Appraisal of Collateral(2)

 

Collateral discount(3)

 

(2.0%)-20.0%/(1.4%)

Total

 

$

15,393

 

 

 

 

 

 

 

 

(1)

Consisted of seven loans with an aggregate balance of $10.2 million and with $604,000 in specific loan loss allowance.

(2)

Fair value is generally determined through independent appraisals of the underlying collateral primarily using comparable sales.

(3)

Appraisals may be adjusted by management for qualitative factors such as time, changes in economic conditions and estimated liquidation expense.

 

 

 

September 30, 2020

 

 

 

Total

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

 

(In thousands)

 

Other real estate owned

 

$

5,796

 

 

$

-

 

 

$

-

 

 

$

5,796

 

Impaired loans(1)

 

 

7,920

 

 

 

-

 

 

 

-

 

 

 

7,920

 

Total

 

$

13,716

 

 

$

-

 

 

$

-

 

 

$

13,716

 

 

 

 

September 30, 2020

 

 

Fair Value at

September 30, 2020

 

 

Valuation Technique

 

Unobservable Input

 

Range/(Weighted

Average)

 

 

(Dollars in thousands)

Other real estate owned

 

$

5,796

 

 

Appraisal of Collateral(2)

 

Collateral discount(3)

 

0%/(0%)

Impaired loans(1)

 

 

7,920

 

 

Appraisal of Collateral(2)

 

Collateral discount(3)

 

(2.0%) - 20.0%/(1.4%)

Total

 

$

13,716

 

 

 

 

 

 

 

 

(1)

Consisted of seven loans with an aggregate balance of $8.2 million and with $308,000 in specific loan loss allowance.

(2)

Fair value is generally determined through independent appraisals of the underlying collateral primarily using comparable sales.

(3)

Appraisals may be adjusted by management for qualitative factors such as time, changes in economic conditions and estimated liquidation expense.

At December 31, 2020 and September 30, 2020, the Company did not have any additions to our mortgage servicing assets.  At December 31, 2020 the Company sold loans with servicing released. At September 30, 2020, the Company only sold loans with servicing released.  

The following disclosure of the estimated fair value of financial instruments is made in accordance with the requirements of FASB ASC 825.  The estimated fair value amounts have been determined by the Company using available market information and appropriate valuation methods. However, considerable judgment is necessarily required to interpret market data to develop the

-36-


 

estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts the Company would realize in a current market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts. FASB ASC 825 excludes certain financial instruments and all non-financial instruments from its disclosure requirements.  Accordingly, the aggregate fair value amounts presented may not necessarily represent the underlying fair value of the Company.

The fair value estimates presented herein are based on pertinent information available to management as of December 31, 2020 and September 30, 2020. Although management is not aware of any factors that would significantly affect the estimated fair value amounts, such amounts have not been comprehensively revalued for purposes of these financial statements since December 31, 2020 and, therefore, current estimates of fair value may differ significantly from the amounts presented herein.

The following assumptions were used to estimate the fair value of the Company’s financial instruments:

Cash and Cash Equivalents—These assets are carried at historical cost. The carrying amount is a reasonable estimate of fair value because of the relatively short time between the origination of the instrument and its expected realization.

Investment Securities—Investment and mortgage-backed securities available for sale (carried at fair value), and equity securities (carried at fair value) are measured at fair value on a recurring basis. Fair value measurements for these securities are typically obtained from independent pricing services that we have engaged for this purpose. When available, we, or our independent pricing service, use quoted market prices to measure fair value. If market prices are not available, fair value measurement is based upon models that incorporate available trade, bid and other market information and for structured securities, cash flow and, when available, loan performance data. Because many fixed income securities do not trade on a daily basis, our independent pricing service’s applications apply available information through processes such as benchmark curves, benchmarking of like securities, sector groupings and matrix pricing to prepare evaluations. For each asset class, pricing applications and models are based on information from market sources and integrate relevant credit information. All of our securities available for sale are valued using either of the foregoing methodologies to determine fair value adjustments recorded to our financial statements.    

Loans Receivable—We do not record loans at fair value on a recurring basis. As such, valuation techniques discussed herein for loans are primarily for estimating fair value for FASB ASC 825 disclosure purposes. However, from time to time, we record nonrecurring fair value adjustments to loans to reflect partial write-downs for impairment or the full charge-off of the loan carrying value. The valuation of impaired loans is discussed below. The fair value estimate for FASB ASC 825 purposes differentiates loans based on their financial characteristics, such as product classification, loan category, pricing features and remaining maturity. Prepayment and credit loss estimates are evaluated by loan type and rate. The fair value of loans is estimated by discounting contractual cash flows using discount rates based on current industry pricing, adjusted for prepayment and credit loss estimates.

Impaired Loans—Impaired loans are valued utilizing independent appraisals that rely upon quoted market prices for similar assets in active markets. These appraisals include adjustments to comparable assets based on the appraisers’ market knowledge and experience. The appraisals are adjusted downward by management, as necessary, for changes in relevant valuation factors subsequent to the appraisal date and are considered Level 3 inputs.

Accrued Interest Receivable—This asset is carried at historical cost. The carrying amount is a reasonable estimate of fair value because of the relatively short time between the origination of the instrument and its expected realization.

Restricted Stock—Although restricted stock is an equity interest in the FHLB, it is carried at cost because it does not have a readily determinable fair value as its ownership is restricted and it lacks a market. The estimated fair value approximates the carrying amount.

Other Real Estate Owned—Assets acquired through foreclosure or deed in lieu of foreclosure are recorded at estimated fair value less estimated selling costs when acquired, thus establishing a new cost basis. Fair value is generally based on independent appraisals. These appraisals include adjustments to comparable assets based on the appraisers’ market knowledge and experience, and are considered Level 3 inputs. When an asset is acquired, the excess of the loan balance over fair value, less estimated selling costs, is charged to the ALLL. If the estimated fair value of the asset declines, a write-down is recorded through expense. The valuation of foreclosed assets is subjective in nature and may be adjusted in the future because of, among other factors, changes in the economic conditions.

-37-


 

Deposits—Deposit liabilities are carried at cost. As such, valuation techniques discussed herein for deposits are primarily for estimating fair value for FASB ASC 825 disclosure purposes. The fair value of deposits is discounted based on rates available for borrowings of similar maturities. A decay rate is estimated for non-time deposits. The discount rate for non-time deposits is adjusted for servicing costs based on industry estimates.

Borrowings—Advances from the FHLB are carried at amortized cost. However, we are required to estimate the fair value of long-term debt under FASB ASC 825. The fair value is based on the contractual cash flows discounted using rates currently offered for new notes with similar remaining maturities.

Subordinated Debt—The calculation of fair value in Level 2 is based on observable market values where available.

Derivatives The fair value of derivatives are based on valuation models using observable market data as of the measurement date (Level 2). Our derivatives are traded in an over-the-counter market where quoted market prices are not always available. Therefore, the fair values of derivatives are determined using quantitative models that utilize multiple market inputs. The inputs will vary based on the type of derivative, but could include interest rates, prices and indices to generate continuous yield or pricing curves, prepayment rate, and volatility factors to value the position. The majority of market inputs is actively quoted and can be validated through external sources, including brokers, market transactions and third-party pricing services.

Accrued Interest Payable—This liability is carried at historical cost. The carrying amount is a reasonable estimate of fair value because of the relatively short time between the origination of the instrument and its expected realization.

Commitments to Extend Credit and Letters of Credit— The majority of the Company’s commitments to extend credit and letters of credit carry current market interest rates if converted to loans and are not included in the table below. Because commitments to extend credit and letters of credit are generally unassignable by either the Bank or the borrower, they only have value to the Company and the borrower. The estimated fair value approximates the recorded deferred fee amounts, which are not significant.

Mortgage Servicing Rights—The fair value of mortgage servicing rights is based on observable market prices when available or the present value of expected future cash flows when not available. Assumptions, such as loan default rates, costs to service, and prepayment speeds significantly affect the estimate of future cash flows. Mortgage servicing rights are carried at the lower of cost or fair value.  

-38-


 

The carrying amount and estimated fair value of the Company’s financial instruments as of December 31, 2020 and September 30, 2020 are presented below:

 

 

 

December 31, 2020

 

 

 

Carrying Amount

 

 

Fair Value

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

 

(In thousands)

 

Financial assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

109,222

 

 

$

109,222

 

 

$

109,222

 

 

$

-

 

 

$

-

 

Investment securities available-for-sale

 

 

35,224

 

 

 

35,224

 

 

 

1,020

 

 

 

33,704

 

 

 

500

 

Investment securities held-to-maturity

 

 

14,161

 

 

 

14,745

 

 

 

-

 

 

 

14,745

 

 

 

-

 

Loans receivable, net (including impaired loans)

 

 

990,346

 

 

 

998,545

 

 

 

-

 

 

 

-

 

 

 

998,545

 

Accrued interest receivable

 

 

4,051

 

 

 

4,051

 

 

 

-

 

 

 

4,051

 

 

 

-

 

Restricted stock

 

 

9,327

 

 

 

9,327

 

 

 

-

 

 

 

9,327

 

 

 

-

 

Mortgage servicing rights (included in Other Assets)

 

 

87

 

 

 

87

 

 

 

-

 

 

 

87

 

 

 

-

 

Derivatives (included in Other Assets)

 

 

7,488

 

 

 

7,488

 

 

 

-

 

 

 

7,488

 

 

 

-

 

Financial liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Savings accounts

 

 

46,531

 

 

 

46,531

 

 

 

-

 

 

 

46,531

 

 

 

-

 

Checking and NOW accounts

 

 

352,799

 

 

 

352,799

 

 

 

-

 

 

 

352,799

 

 

 

-

 

Money market accounts

 

 

303,796

 

 

 

303,796

 

 

 

-

 

 

 

303,796

 

 

 

-

 

Certificates of deposit

 

 

197,339

 

 

 

199,959

 

 

 

-

 

 

 

199,959

 

 

 

-

 

Borrowings (excluding sub debt)

 

 

135,000

 

 

 

135,706

 

 

 

-

 

 

 

135,706

 

 

 

-

 

Subordinated debt

 

 

24,816

 

 

 

24,845

 

 

 

-

 

 

 

24,845

 

 

 

-

 

Derivatives (included in Other Liabilities)

 

 

8,509

 

 

 

8,509

 

 

 

-

 

 

 

8,509

 

 

 

-

 

Accrued interest payable

 

 

1,078

 

 

 

1,078

 

 

 

-

 

 

 

1,078

 

 

 

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2020

 

 

 

Carrying Amount

 

 

Fair Value

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

 

(In thousands)

 

Financial assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

61,439

 

 

$

61,439

 

 

$

61,439

 

 

$

-

 

 

$

-

 

Investment securities available-for-sale

 

 

31,541

 

 

 

31,541

 

 

 

1,023

 

 

 

30,018

 

 

 

500

 

Investment securities held-to-maturity

 

 

14,970

 

 

 

15,608

 

 

 

-

 

 

 

15,608

 

 

 

-

 

Loans receivable, net (including impaired loans)

 

 

1,031,392

 

 

 

1,039,981

 

 

 

-

 

 

 

-

 

 

 

1,039,981

 

Accrued interest receivable

 

 

3,677

 

 

 

3,677

 

 

 

-

 

 

 

3,677

 

 

 

-

 

Restricted stock

 

 

9,622

 

 

 

9,622

 

 

 

-

 

 

 

9,622

 

 

 

-

 

Mortgage servicing rights (included in Other Assets)

 

 

111

 

 

 

111

 

 

 

-

 

 

 

111

 

 

 

-

 

Derivatives (included in Other Assets)

 

 

8,752

 

 

 

8,752

 

 

 

-

 

 

 

8,752

 

 

 

-

 

Financial liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Savings accounts

 

 

45,072

 

 

 

45,072

 

 

 

-

 

 

 

45,072

 

 

 

-

 

Checking and NOW accounts

 

 

354,104

 

 

 

354,104

 

 

 

-

 

 

 

354,104

 

 

 

-

 

Money market accounts

 

 

277,711

 

 

 

277,711

 

 

 

-

 

 

 

277,711

 

 

 

-

 

Certificates of deposit

 

 

214,019

 

 

 

217,212

 

 

 

-

 

 

 

217,212

 

 

 

-

 

Borrowings (excluding sub debt)

 

 

134,225

 

 

 

135,101

 

 

 

-

 

 

 

135,101

 

 

 

-

 

Subordinated debt

 

 

24,776

 

 

 

25,030

 

 

 

-

 

 

 

25,030

 

 

 

-

 

Derivatives (included in Other Liabilities)

 

 

10,047

 

 

 

10,047

 

 

 

-

 

 

 

10,047

 

 

 

-

 

Accrued interest payable

 

 

728

 

 

 

728

 

 

 

-

 

 

 

728

 

 

 

-

 

 

-39-


 

Note 12 – Comprehensive Income (Loss)

The components of accumulated other comprehensive loss included in shareholders’ equity are as follows:

 

 

 

December 31,

2020

 

 

September 30,

2020

 

 

 

(In thousands)

 

Net unrealized holding losses on available-for-sale securities

 

$

(15

)

 

$

(118

)

Tax effect

 

 

3

 

 

 

25

 

Net of tax amount

 

 

(12

)

 

 

(93

)

Fair value adjustments on derivatives

 

 

(989

)

 

 

(1,260

)

Tax effect

 

 

208

 

 

 

265

 

Net of tax amount

 

 

(781

)

 

 

(995

)

Total accumulated other comprehensive loss

 

$

(793

)

 

$

(1,088

)

 

Other comprehensive income and related tax effects are presented in the following table:

 

 

 

Three Months Ended December 31,

 

 

 

2020

 

 

2019

 

 

 

(In thousands)

 

Net unrealized holding (losses) gains on available-for-sale securities

 

$

457

 

 

$

71

 

 

 

 

 

 

 

 

 

 

Net realized gain on securities available-for-sale

 

 

(355

)

 

 

-

 

 

 

 

 

 

 

 

 

 

Amortization of unrealized holding losses on securities transferred

   from available-for-sale to held-to-maturity

 

 

1

 

 

 

1

 

 

 

 

 

 

 

 

 

 

Adjustment for loss recorded on replacement of derivative

 

 

(2

)

 

 

-

 

 

 

 

 

 

 

 

 

 

Fair value adjustments on derivatives

 

 

273

 

 

 

91

 

Other comprehensive income before taxes

 

 

374

 

 

 

163

 

Tax effect

 

 

(79

)

 

 

(34

)

Total other comprehensive income

 

$

295

 

 

$

129

 

 

Note 13 – Equity Based Incentive Compensation Plan

The Company maintains the Malvern Bancorp, Inc. 2014 Long-Term Incentive Compensation Plan (the “2014 Plan”), which permits the grant of long-term incentive and other stock and cash awards. The purpose of the 2014 Plan is to promote the success of the Company and the Bank by providing incentives to officers, employees and directors of the Company and the Bank that will link their personal interests to the financial success of the Company and to growth in shareholder value.  The maximum total number of shares of the Company’s common stock available for grants under the 2014 Plan is 400,000.  As of December 31, 2020, there were 318,651 remaining shares available for future grants.

Restricted stock and option awards granted vest annually in 20% increments beginning on the one year anniversary of the grant date, and accelerate upon a change in control of the Company.  The options generally expire ten years from the date of grant.  All issuances are subject to forfeiture if the recipient leaves or is terminated prior to the award’s vesting.  Shares of restricted stock have the same dividend and voting rights as common stock while stock options do not.

All awards are issued at fair value of the underlying shares at the grant date. The Company expenses the cost of the awards, which is determined to be the fair market value of the awards at the date of grant.

 The Company did 0t grant any stock options during the three months ended December 31, 2020 and December 31, 2019.  Total compensation expense related to stock options granted under the 2014 Plan was approximately $8,000 and $6,000 for the three months ended December 31, 2020 and December 31, 2019, respectively.    

The Company did 0t award restricted shares during the three months ended December 31, 2020. The compensation expense related to restricted stock awards was approximately $44,000 during the three months ended December 31, 2020.  During the three

-40-


 

months ended December 31, 2019 a total of 1,764 restricted shares were awarded. During the three months ended December 31, 2019 1,610 shares were forfeited. The compensation expense related to restricted stock awards was approximately $26,000 during the three months ended December 31, 2019.       

Stock-based compensation expense for the cost of the awards granted is based on the grant-date fair value. For stock option awards, the fair value is estimated at the date of grant using the Black-Scholes option-pricing model. This model requires the input of highly subjective assumptions, changes to which can materially affect the fair value estimate. Additionally, there may be other factors that would otherwise have a significant effect on the value of employee stock options granted but are not considered by the model. Accordingly, while management believes that the Black-Scholes option-pricing model provides a reasonable estimate of fair value, the model does not necessarily provide the best single measure of fair value for the Company’s employee stock options.

Stock Options

 

The following is a summary of stock option activity for the three months ended December 31, 2020:

 

 

 

Shares

 

 

Weighted Average

Exercise Price

 

 

Weighted Average Remaining Contractual Term (In Years)

 

 

Aggregate Intrinsic

Value

 

Outstanding, beginning of year

 

 

25,830

 

 

$

21.57

 

 

 

 

 

 

$

-

 

Granted

 

 

-

 

 

$

-

 

 

 

 

 

 

$

-

 

Exercised

 

 

-

 

 

$

-

 

 

 

 

 

 

$

-

 

Forfeited/cancelled/expired

 

 

-

 

 

$

-

 

 

 

 

 

 

$

-

 

Outstanding, at December 31, 2020

 

 

25,830

 

 

$

21.57

 

 

 

6.599

 

 

$

-

 

Exercisable, at December 31, 2020

 

 

9,310

 

 

$

22.09

 

 

 

8.113

 

 

$

-

 

Nonvested, at December 31, 2020

 

 

16,520

 

 

$

21.28

 

 

 

 

 

 

 

 

 

 

As of December 31, 2020, there was approximately $76,000 of total unrecognized compensation cost related to nonvested stock options under the 2014 Plan.  The cost is expected to be recognized over a weighted average period of 3.00 years.

Restricted Stock Awards

The table below summarizes the activity for the Company’s restricted stock outstanding during the three months ended December 31, 2020:

 

 

 

Shares

 

 

Weighted Average

Fair Value

 

Outstanding, beginning of year

 

 

30,653

 

 

$

21.98

 

Granted

 

 

-

 

 

$

-

 

Vested

 

 

(859

)

 

$

21.01

 

Forfeited/cancelled/expired

 

 

-

 

 

$

-

 

Outstanding, end of year

 

 

29,794

 

 

$

22.00

 

 

As of December 31, 2020, there was approximately $318,000 of total unrecognized compensation cost related to nonvested shares of restricted stock granted under the 2014 Plan.  The cost is expected to be recognized over a weighted average period of 3.38 years.

        

 

-41-


 

Note 14 – Deposits

Deposits classified by type with percentages to total deposits at December 31, 2020 and September 30, 2020 consisted of the following:

 

 

 

December 31,

 

 

September 30,

 

 

 

2020

 

 

2020

 

 

 

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balances by types of deposit:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Savings

 

$

46,531

 

 

 

5.17

%

 

$

45,072

 

 

 

5.06

%

Money market accounts

 

 

303,796

 

 

 

33.73

 

 

 

277,711

 

 

 

31.17

 

Interest-bearing demand

 

 

303,535

 

 

 

33.71

 

 

 

303,682

 

 

 

34.09

 

Non-interest-bearing demand

 

 

49,264

 

 

 

5.47

 

 

 

50,422

 

 

 

5.66

 

 

 

 

703,126

 

 

 

78.08

%

 

 

676,887

 

 

 

75.98

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Certificates of deposit

 

 

197,339

 

 

 

21.92

%

 

 

214,019

 

 

 

24.02

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Deposits

 

$

900,465

 

 

 

100.00

%

 

$

890,906

 

 

 

100.00

%

 

The total amount of certificates of deposit of $250,000 and greater at December 31, 2020 and September 30, 2020 was $54.4 million and $48.4 million, respectively.  We had brokered deposits totaling $6.1 million and $31.1 million at December 31, 2020 and September 30, 2020, respectively.

 

Interest expense on deposits consisted of the following:

 

 

 

Three Months Ended December 31,

 

 

 

2020

 

 

2019

 

 

 

(In thousands)

 

Savings accounts

 

$

18

 

 

$

11

 

Money market accounts

 

 

791

 

 

 

1,098

 

Interest-bearing demand

 

 

547

 

 

 

1,181

 

Certificates of deposit

 

 

901

 

 

 

1,447

 

Total

 

$

2,257

 

 

$

3,737

 

 

As of December 31, 2020, the scheduled maturities of certificates of deposits are as follows:

 

 

 

Scheduled Maturities

 

 

 

(In thousands)

 

Period Ending December 31,

 

 

 

 

2021

 

$

138,051

 

2022

 

 

25,402

 

2023

 

 

17,107

 

2024

 

 

9,551

 

2025

 

 

5,685

 

Thereafter

 

 

1,543

 

Total

 

$

197,339

 

 

 

 

 

 

As of December 31, 2020, the scheduled maturities of certificates of deposits in amounts greater than $100,000 are as follows:

 

-42-


 

 

 

Scheduled Maturities

 

 

 

(In thousands)

 

Period Ending December 31,

 

 

 

 

Three months or less

 

$

43,247

 

Over three through six months

 

 

44,048

 

Over six through twelve months

 

 

14,609

 

Over twelve months

 

 

31,261

 

Total

 

$

133,165

 

 

 

 

 

 

 

 

 

 

Note 15 – Leases

          The Company determines if an arrangement is a lease at inception. The Company adopted the guidance of ASC 842 Leases and recorded ROU assets and related lease liabilities of $3.3 million at October 1, 2019. Operating leases are included in operating lease ROU assets and operating lease liabilities on our consolidated statements of financial condition. ROU assets and operating lease liabilities are recognized based on the present value of the future lease payments over the lease term at commencement date. As our leases do not provide an implicit rate, in order to determine the present value of future payments for office leases we used our incremental borrowing rate based on the FHLB liquidity and funding rates. Our lease terms may include options to extend when it is reasonably certain that we will exercise that option. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term.

           As of December 31, 2020, the Company leases 1 financial center in Glen Mills, Pennsylvania; 1 private banking office located in Villanova, Pennsylvania; 1 private banking office located in Morristown, New Jersey; 1 private banking office located in Palm Beach, Florida; 1 representative office located in Wellington, Florida; and 1 representative office located in Allentown, Pennsylvania. The Company has elected not to recognize ROU assets and lease liabilities for 2 private banking office leases and 2 representative office leases whose terms are twelve months or less and are considered short-term leases. All of the financial center leases and 2 private banking office leases include options to extend for terms of five years. These options have not been recognized as part of our ROU assets and lease liabilities as the Company is not reasonably certain to exercise these options. The Company has also entered into 3 leases for office equipment for which ROU assets and lease liabilities have been recognized. All the aforementioned leases have been accounted for as operating leases.

The components of lease expense were as follows:

 

 

 

Three Months Ended December 31,

 

 

 

2020

 

 

2019

 

 

 

(In thousands)

 

Operating lease cost

 

$

171

 

 

$

175

 

Finance lease cost

 

 

-

 

 

 

-

 

Short-term lease cost

 

 

22

 

 

 

25

 

Total

 

$

193

 

 

$

200

 

Supplemental information at and for December 31, 2020 and the three months ended December 31, 2020 related to leases was as follows:

-43-


 

 

 

December 31, 2020

 

 

 

(Dollars in thousands)

 

Supplemental balance sheet information

 

 

 

 

Operating lease right-of-use assets

 

$

2,479

 

Operating lease liabilities

 

$

2,512

 

Weighted average remaining lease term

 

5.24 years

 

Weighted average discount rate

 

 

1.99

%

 

 

 

 

 

 

 

Three Months Ended December 31, 2020

 

 

 

(In thousands)

 

Supplemental cash flow information

 

 

 

 

Operating cash flows from operating leases

 

$

172

 

ROU assets obtained in exchange for lease obligations

 

$

3,279

 

 

 

 

 

 

Maturities of lease liabilities were as follows:

 

 

 

Operating Leases

 

 

 

(In thousands)

 

Period Ending September 30,

 

 

 

 

Remainder of 2021

 

$

426

 

2022

 

 

492

 

2023

 

 

474

 

2024

 

 

474

 

2025

 

 

477

 

Thereafter

 

 

269

 

Total lease payments

 

$

2,612

 

    Less: imputed interest

 

 

(100

)

Total

 

$

2,512

 

 

 

 

 

 

 

           

 

-44-


 

Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations

The purpose of this analysis is to provide the reader with information relevant to understanding and assessing the Company’s results of operations for the periods presented herein and financial condition as of December 31, 2020 and September 30, 2020. In order to fully understand this analysis, the reader is encouraged to review the consolidated financial statements and accompanying notes thereto appearing elsewhere in this report.

Forward-Looking Statements

           The statements contained herein that are not historical facts are forward-looking statements based on management’s current expectations and beliefs concerning future developments and their potential effects on the Company, including, without limitation, plans, strategies and goals, and statements about the Company’s expectations regarding revenue and asset growth, financial performance and profitability, loan and deposit growth, yields and returns, loan diversification and credit management, and shareholder value creation.

 

Such statements involve inherent risks and uncertainties, many of which are difficult to predict and are generally beyond the control of the Company.  There can be no assurance that future developments affecting the Company will be the same as those anticipated by management.  The Company cautions readers that a number of important factors could cause actual results to differ materially from those expressed in, or implied or projected by, such forward-looking statements.  These risks and uncertainties include, but are not limited to, the following: the effects of, and changes in, trade, monetary and fiscal policies and laws, including changes in interest rate policies of the Board of Governors of the Federal Reserve System; inflation, interest rate, market and monetary fluctuations; the impact of competition and the acceptance of the Company’s products and services by new and existing customers; the impact of changes in financial services policies, laws and regulations; technological changes; any oversupply of inventory and deterioration in values of real estate in the markets in which the Company operates, both residential and commercial; the effect of changes in accounting policies and practices, as may be adopted from time-to-time by bank regulatory agencies, the Securities and Exchange Commission (“SEC”), the Public Company Accounting Oversight Board, the Financial Accounting Standards Board or other accounting standards setters; possible other-than-temporary impairment of securities held by us; the effects of the Company’s lack of a widely-diversified loan portfolio, including the risks of geographic and industry concentrations; ability to attract deposits and other sources of liquidity; changes in the competitive environment among financial and bank holding companies and other financial service providers; unanticipated regulatory or judicial proceedings; and the Company’s ability to manage the risk involved in the foregoing.  Additional factors that could cause actual results to differ materially from those expressed in the forward-looking statements are discussed in the Company’s 2020 Annual Report filed with the SEC and available at the SEC’s Internet site (http://www.sec.gov).

 

Further, given its ongoing and dynamic nature, it is difficult to predict the full impact of the COVID-19 outbreak on our business. The extent of such impact will depend on future developments, which are highly uncertain, including when the coronavirus can be controlled and abated and when and how the economy may be fully reopened. As the result of the COVID-19 pandemic and the related adverse local and national economic consequences, we are subject to any of the following risks, any of which could continue to have a material, adverse effect on our business, financial condition, liquidity, and results of operations: the demand for our products and services may decline, making it difficult to grow assets and income; if the economy is unable to continue to substantially reopen, and high levels of unemployment continue for an extended period of time, loan delinquencies, problem assets, and foreclosures may increase, resulting in increased charges and reduced income; collateral for loans, especially real estate, may decline in value, which could cause loan losses to increase; our allowance for loan losses may increase if borrowers experience financial difficulties, which will adversely affect our net income; the net worth and liquidity of loan guarantors may decline, impairing their ability to honor commitments to us; as the result of the decline in the Federal Reserve Board’s target federal funds rate to near 0%, the yield on our assets may decline to a greater extent than the decline in our cost of interest-bearing liabilities, reducing our net interest margin and spread and reducing net income; our cyber security risks are increased as the result of an increase in the number of employees working remotely; and FDIC premiums may increase if the agency experience additional resolution costs.

 

The Company undertakes no obligation to revise or publicly release any revision or update to these forward-looking statements to reflect events or circumstances that occur after the date on which such statements were made, unless required by law.   

 

Critical Accounting Policies

The accounting and reporting policies followed by the Company conform, in all material respects, to GAAP. In preparing the consolidated financial statements, management has made estimates, judgments and assumptions that affect the reported amounts of assets and liabilities as of the dates of the consolidated statements of condition and for the periods indicated in the statements of operations. Actual results could differ significantly from those estimates.

-45-


 

The Company’s accounting policies are fundamental to understanding Management’s Discussion and Analysis (“MD&A”) of financial condition and results of operations. The Company has identified the determination of the ALLL, OREO, fair value measurements, the evaluation of deferred tax assets, the other-than-temporary impairment evaluation of securities, and the valuation of our derivative positions to be critical because management must make subjective and/or complex judgments about matters that are inherently uncertain and could be most subject to revision as new information becomes available. Additional information on these policies can be found in the Company’s 2020 Annual Report.

There have been no significant changes to the Company’s Critical Accounting Policies as described in its 2020 Annual Report. 

 

Impact of COVID-19

 

The Company continues to take the following significant steps to protect the health and well-being of its employees and clients and to assist clients who have been impacted by the COVID-19 pandemic.

 

 

Continuing limited lobby hours; prioritizing drive-thru and appointment banking.  

 

High-risk designated hours offered to assist our high-risk clients.

 

Continuing to assist existing and new customers in the PPP.

 

Continuing to provide payment deferrals and forbearances to business customers and mortgage customers that are experiencing hardship because of the COVID-19 pandemic.

 

Paycheck Protection Program

 

The Company participated in the initial PPP when the program was officially launched by the SBA and Treasury Department under the CARES Act. Recognizing the significance of operational risk that this portfolio of loans poses, and the continued complexity and uncertainty surrounding evolving regulatory pronouncements regarding various aspects of the PPP, management reviewed several options for continued servicing of the PPP loan portfolio through forgiveness and beyond. After thoughtful consideration, the Company concluded that it was in the best interests of both the Bank and our PPP borrowers that the loans be serviced by an organization that has the servicing infrastructure in place to support the significant volume and short timeframe involved in the complex and evolving PPP forgiveness process. In that regard, in mid-December, the Bank sold substantially all of its PPP loans to a seasoned and experienced non-bank lender and servicer of SBA loans. In connection with the sale, the Company recognized a $202,000 net gain on the sale of approximately $19.7 million of PPP loans, which was recorded as non-interest income for the period ended December 31, 2020. We are currently working with the same third party in order for our customers to be able to participate in the updated PPP loan program adopted as part of the COVID-19 stimulus bill enacted in December 2020 as part of the 2021 Consolidated Appropriations Act.

 

Liquidity Sources

 

Management has reviewed all primary and secondary sources of liquidity in preparation for any unforeseen funding needs due to the COVID-19 pandemic and prioritized such sources based on available capacity, term flexibility, and cost. As of December 31, 2020, the Company had adequate sources of liquidity.

 

Capital Strength

The Company’s capital ratios continued to exceed the highest required regulatory benchmark levels.

 

As of December 31, 2020, common equity Tier 1 capital ratio was 14.30 percent, Tier 1 leverage ratio was 11.76 percent, Tier 1 risk-based capital ratio was 14.30 percent and the total risk-based capital ratio was 18.01 percent.  

 

Deferral Requests

 

As of December 31, 2020, the Company had 16 COVID-19 loan modification agreements with respect to $68.9 million of loans representing 6.9 percent of loans outstanding. The COVID-19 loan modifications do not classify as TDRs as they fall under the CARES Act Section 4013, and further details regarding these modifications are provided in the table below.  At March 8, 2021, the Company had seven COVID-19-related modified loan deferrals totaling $1.9 million or 0.2% of total loans. Of the remaining $1.9 million of loan deferrals, approximately $1.5 million or 79% of the deferrals are paying the contractual interest payments.  For loans subject to the program, each borrower is required to resume making regularly scheduled loan payments at the end of the modification period and the deferred amounts will be moved to the end of the loan term.

 

 

-46-


 

 

December 31, 2020

 

 

Number of Loans

 

 

Loan Deferment Exposure

 

 

Gross Loans December 31, 2020

 

 

Percentage of Gross Loans on Deferral

 

 

 

 

 

 

(Dollars in thousands)

 

 

 

 

 

Residential mortgage

 

5

 

 

$

934

 

 

$

232,481

 

 

 

0.09

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Construction and Development:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential and commercial

 

-

 

 

 

-

 

 

 

73,000

 

 

 

0.00

%

Land loans

 

-

 

 

 

-

 

 

 

3,648

 

 

 

0.00

%

Total Construction and Development

 

-

 

 

 

-

 

 

 

76,648

 

 

 

0.00

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate

 

7

 

 

 

67,082

 

 

 

478,808

 

 

 

6.69

%

Farmland

 

-

 

 

 

-

 

 

 

7,378

 

 

 

0.00

%

Multi-family

 

1

 

 

 

717

 

 

 

67,457

 

 

 

0.08

%

Commercial and industrial

 

1

 

 

 

22

 

 

 

101,852

 

 

 

0.00

%

Other

 

-

 

 

 

-

 

 

 

10,010

 

 

 

0.00

%

Total Commercial

 

9

 

 

 

67,821

 

 

 

665,505

 

 

 

6.77

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consumer:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Home equity lines of credit

 

1

 

 

 

131

 

 

 

16,389

 

 

 

0.01

%

Second mortgages

 

1

 

 

 

17

 

 

 

9,097

 

 

 

0.00

%

Other

 

-

 

 

 

-

 

 

 

2,388

 

 

 

0.00

%

Total Consumer

 

2

 

 

 

148

 

 

 

27,874

 

 

 

0.01

%

Total loans

 

16

 

 

$

68,903

 

 

$

1,002,508

 

 

 

6.87

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2020

 

 

Number of Loans

 

 

Loan Deferment Exposure

 

 

Gross Loans September 30, 2020

 

 

Percentage of Gross Loans on Deferral

 

 

 

 

 

 

(Dollars in thousands)

 

 

 

 

 

Residential mortgage

 

5